 Where there is free market competition, there is consumer sovereignty. What gets produced is what consumers demand, because any firm producing a good or service that does not satisfy consumer preferences will soon go bankrupt and the resources they control will pass into more capable hands. This video will explain the mechanism by which consumer preferences for law and justice are reflected in the policies and decisions made by arbitrators and protection agencies. There are two potential sources of conflict between protection agencies. We previously looked at a conflict about circumstances. When a client of Dawn Defence accused a client of tanner justice of mugging, the two agencies could not agree about what events had actually taken place between their clients. They hired a mutually agreed upon arbitration firm to peacefully settle this disagreement about facts. There was no disagreement about principles. Dawn Defence insisted on punishing Bill with a fine of $10,000 and tanner justice had no objection about the suitability of this punishment. But what if they did object? Suppose tanner justice felt that Bill should only be fined $5,000. How are the two firms going to resolve this conflict? Both firms will want to avoid war, because war is expensive and their customers are free to desert them and subscribe to their cheaper and more peaceful competitors. Instead of violence, they will negotiate with each other to reach a peaceful settlement. Whether they settle on $5,000 or $10,000 or compromise at something in between will depend on their respective bargaining power. And this bargaining power depends ultimately on the consumers. To illustrate how consumers influence bargaining power, take a more extreme example, a disagreement about the suitable punishment for murder. Bill, a customer of tanner justice, murdered Alice, a customer of Dawn Defence and possibly after hiring a third party, neither side disputes the facts. The disagreement is that Dawn Defence is in favour of the death penalty for murderers while tanner justice is opposed. Will it be life or death for Bill? It seems as though one protection agency is going to lose out here. Dawn Defence has advertised itself as pro-capital punishment. It has promised its customers that it will seek the death penalty against anyone guilty of murder. They could potentially lose lots of customers if Bill, the murderer of Alice, their customer, escapes with his life. Tanner justice is anti-capital punishment. It has promised its customers that it will seek to protect them even when they are judged guilty of murder against anyone who threatens them with the death penalty. If they can't prevent Bill being killed by Dawn Defence, they could potentially lose lots of customers as well. It is in the strong interest of both agencies that their own punishment is the one used. But one of them must back down because there is no compromise between life and death and the only other alternative is war. Here is one way they might resolve the conflict peacefully. Suppose Dawn Defence estimates that if it backs down in this case, it will lose $1 million worth of revenue from customers who abandon them because they cannot deliver on their pro-death penalty position. This means they will be willing to pay up to $1 million to ensure that Bill gets the death penalty so that they hold on to these customers. Tanner justice similarly estimates how many customers they would lose by backing down. They estimate it will lose them $500,000 in revenue so they will be willing to pay up to $500,000 to prevent Bill getting killed. So the two sides come to an agreement. Dawn Defence offers to pay $800,000 to Tanner justice if they will stand down in this case and allow them to kill Bill. This deal is worth $200,000 to Dawn Defence. Tanner justice accepts the offer because if their estimates are correct, they gain $300,000 from the deal. As with any voluntary trade, both parties benefit from this agreement. As a result, Tanner justice stand down from defending Bill and he is executed. Tanners benefit too because as a whole they are willing to pay $1 million to see Bill killed but only willing to pay $500,000 to see him escape with life. We have looked at a conflict about principles where there is a fundamental disagreement about what punishment is suitable. The conflict was resolved when a payment was made from one firm to another so that their punishment would be the one used in the case. The direction of the payment was determined by the bargaining power of the two firms and ultimately by consumer preferences. If the two firms are large and well established, they will likely have an advance agreement on what to do when there is a murder between their clients. It may be that Dawn Defence makes annual payments to Tanner justice so that capital punishment is used in every case. If we posit additional security firms, some pro-capital punishment and some anti, a network of payments will emerge, with each firm calculating how much a favourable agreement with another firm is worth to them. On other issues, such as what is the suitable punishment for mugging, the pattern of payments may look very different. The pattern is ultimately determined by consumer preferences. One of the many areas in which the protection agencies compete with each other is in how successful they are at getting their advertised punishments enforced against clients of other firms. As we would expect, where there is a free market in law, there is consumer sovereignty. The laws and punishments enforced, in cases where there is a disagreement about what the punishment should be, are determined ultimately by the preferences of consumers through this bargaining mechanism between protection agencies. Using this framework, we can begin to make reasonable guesses about what laws are likely to exist under a system of competing providers.