Lap dancing around the regulations

Updated Thursday 18th March 2010

Can lap dancing clubs teach businesses a trick or two about dealing with regulation? Leslie Budd investigates.

In the late 1990s it was rumoured that an international investment based in London met with clients and competitors to make deals and set prices for a number of financial assets in one of the private rooms of a famous lap dancing club. Rumours also abound of trans-national corporations in certain sectors meeting once a year in possibly exotic locations to agree prices in their markets.

The boundary between co-operation and collusion among competitors can be a fluid one. Collusion between firms is illegal but the establishment of joint ventures can sometimes make the division between co-operation and collusion more permeable in some sectors and markets. It is the duty of regulators to attempt to define less porous boundaries.

A lap dance club in Rome [Image: Twm™ under CC-BY-NC-ND licence] Creative commons image Icon Twm™ under CC-BY-NC-ND licence under Creative-Commons license
A lap dance club in Rome

You might say what have lap dancing clubs got to do with the business relationships between competitors? Well apart from their metaphorical utility, they point up some of the paradoxes about regulation.

Lap dancing clubs are seen as part of the sex industry but had been regulated under the Public Entertainment Licence (PEL) which covers venues which sell alcohol.

At present there are proposals to regulate them under the sex licensing legislation, which is more restrictive. The moral and social issues about these type of establishments, notwithstanding, it does point to the problematic nature of business regulation.

Like difficult customers, businesses frequently complain about regulation, and point to apparently nonsensical examples. Yet one of the paradoxes is that not only does regulation often sustain the competitive environment, but also allows businesses to follow their own self-interest.

Adam Smith Copyright free image Icon Copyright free: Library Of Congress via Wikimedia
Adam Smith

The notion of self-interest is most frequently associated with Adam Smith's The Wealth of Nations, perhaps one of the most misinterpreted books in history. In his previous work The Theory of Moral Sentiments, he pointed out that if individuals do not have a 'moral sentiment' with counterparts in economic exchange then their self-interest will not be realised and just prices will not ensue. Regulation frequently substitutes for moral sentiment in market economies.

Regulatory arbitrage

By the same token, differences in regulation of time, place or market can present new opportunities. These come under the heading of regulatory arbitrage. Arbitrage is the process of taking advantage of differences in prices in two or more markets.

An example of the regulatory version is the establishment of the Euro-dollar market in London in the early 1960s. Regulation in the United States, at the time, limited foreign access to dollar deposits. To circumvent these regulations a new offshore ('Euro') market developed to cater for this suppressed external demand.

There is an equivalent in our lap dancing example, by being licensed as a PEL rather than being regulated as sex establishment, these clubs had lower regulatory costs.

Systemic Risk and regulatory risk

The related issue is risk, of which two types are relevant here: systemic risk and regulatory risk. The former is that posed to the economy and financial system as a whole, whilst the former occurs when changes in laws and regulations impact on business activities.

The risk management strategies of minimising the impact of this regulatory type may perversely lever up systemic risk. This applies more strongly to firms with dominant or monopolistic market power. By exploiting their ability to extract economic rents from their commanding market heights, in order to limit regulatory risk, these firms may reduce economic welfare in the economy. This consists of lower output, income and employment - the consequence of which is to lever up systemic risk.

The thought of scantily-clad or naked businessmen (and aficionados of this type of establishment tend mainly, though not exclusively, to be men) gyrating around a regulatory pole and responding to bids to set prices from a closed audience is not a pretty one.

The bottom line is that if you regulate these collusive activities as the equivalent of PELs and not something more visceral, based on co-operative relationships, we all be will be dancing our way to some kind of oblivion.

Find out more

Evan Davis on the burdens of compliance

Howard Viney considers regulation in a volatile market

Steve Godrich explains how over-regulation might be killing pubs

Keep track of the red tape and avoid the red mist with The Open University Business School


For further information, take a look at our frequently asked questions which may give you the support you need.

Have a question?

Other content you may like

article icon

Money & Business 

Calculated risk

Dr Brian D Smith looks at why some business ventures are riskier than others.

How to make investment decisions Copyrighted image Icon Copyright: BBC video icon

Money & Business 

How to make investment decisions

To invest or not to invest? Jon Moulton shares stories of success and failure from his life as an investor of private equity.

5 mins
Your Choice, Your Brand? Yoghurt Copyrighted image Icon Copyright: The Open University activity icon

Money & Business 

Your Choice, Your Brand? Yoghurt

There's a bewildering range of yoghurts fighting for your attention on shop shelves. How do you select one that's right for you?

Theo on... making money online Copyrighted image Icon Copyright: Tiger Aspect audio icon

Money & Business 

Theo on... making money online

Theo Paphitis warns you need to do a lot more than wait for a buyer if you want to make money online.

5 mins
Heathrow under pressure Copyrighted image Icon Copyright: Production team video icon

Money & Business 

Heathrow under pressure

While producing 'Heathrow: Ready for Take Off?', the Money Programme interviewed key people with views on the expansion of the airport. Here you can watch extended versions of several interviews.

10 mins
It's 1892, and the future's bright for gas lighting Creative commons image Icon Andrew Davidson at en.wikipedia under Creative Commons BY-SA 4.0 license article icon

Money & Business 

It's 1892, and the future's bright for gas lighting

The new electric lighting will never be more than a luxury product, stockholders in the Gas Light & Coke Company are reassured at the company's 1892 meeting.

article icon

Money & Business 

Flying in the face of climate change

Aviation comes under the spotlight in the quest to reduce CO2 emissions.

article icon

Money & Business 

Breaking Habits

Brian Smith compares BA's and Intel's ability to adapt to changes in the market in a recession.

Introducing a framework for strategy Copyrighted image Icon Copyright: Used with permission free course icon Level 3 icon

Money & Business 

Introducing a framework for strategy

If you are currently engaged in strategic decision-making, or will be in the future, this free course, Introducing a framework for strategy, will stimulate your imagination and inform your judgement. An understanding of the frameworks of strategy and an ability to use them imaginatively will help your organisation survive in the longer-term and perform its role more effectively.

Free course
10 hrs