Why Competition Matters?

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The most logical topic to start this blog is competition. Competition in biology and sociology, is a contest between two or more organisms, animals, individuals, groups, etc., for territory, a niche, a location of resources, goods, mates, prestige, recognition, awards, group or social status, or for leadership (c1).

For purposes of Antitrust we must use the economic definition as it is predominantly used by the courts; defined as is the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. (c2)

There is no complete consensus as to whether competitive behavior is a human-derived behavior or intrinsically genetic. (c3) However, what needs to be acknowledged is that human societies are predominantly competitive toward each other. The nature of competition is at least partially responsible for the advancement of our species, both individually and collectively, and is ubiquitous in our society.

Various economic theories have sought to explain the nature of competition, how it shapes the structure of concomitant political systems in every sovereign nation-state, and how social structures are influenced by competition’s impact on the economy and politics of each nation-state. Theories of competition are derived directly from various economic doctrines views on the primary economic goal, the main economic process, principal means, trade theory, and organization of government. The various economic doctrines views on each of these points are best summarized by a chart from The Information Technology & Innovation Foundation shown below (c4).

Economic Theories Outlined

Personally falling in line with the Neo-Keynesian Economics Doctrine, I believe competition matters for several reasons.

  • High levels of competition in a market provide consumers with more choice in their search for goods and services.
  • Competition can create a sense of purpose among individuals with the business they conduct and ironically, I would argue the pursuit of monopoly is a core goal companies should be striving to succeed at, since it means they have gained total market power, (n1) at least in the short term, in their industry.
  • High levels of competition create natural market pricing controls for the consumer, where high levels of competition lower prices for consumers, or alternatively create multiple factions within a market to meet the demands of all consumers since they would be able to differentiate on quality, price, distribution method etc. (c5)
  • High levels of competition usually indicate low, or at least lower, barriers to entry in a market, where people can freely enter or exit as they choose, usually with lower risk (c6).

 Among the aforementioned benefits of competition, providing greater choice to consumers must rank at the top. A simple thought experiment can clarify this assertion. Imagine a world where only Google search was available to browse the internet. Now a great deal of us might be tolerant of this situation, but, perhaps almost immediately, several factions of people, particularly the most privacy adverse, would be in near revolt. One could reasonably assume that someone would start their own search engine that aligns with the values of this faction. There is no question that the mere existence of this competition would force Google to at least consider altering their business model or services provided to cater to this faction or if left unchecked, due to potential natural market forces, perhaps overtake Google.

It is important to mention an underlying assumption of this situation is that the consumer is knowledgeable of alternatives. This is why the degree of competition in a market is, at least partially, determined by the knowledge of the consumer. Thus, the level of transparency within a market directly correlates with the mitigation of risk in the market.

If consumers were as knowledgeable as they possibly could be they would know all alternatives in the market, their prices, and the quality, consumers would be able to determine which product best suited their needs and desires. This points out an important role or alternative action government can take when considering antitrust cases and forces us to constantly consider what effect can alternative government regulation outweigh potential antitrust litigation? This scrupulous thought process and questioning must be present in any antitrust analysis.

Given the benefits of high levels competition, it might be natural to think that can there ever be too much competition and competition can never harm a market. What we do know is that too much choice can create consumer anxiety (c7).

Nevertheless, choice in a market allows the greatest probability for the freedom to associate your personal beliefs with your desires.

Taking our thought experiment further, not only is Google search the only available search engine, now let’s say that Google search, through government sanction or through aggressive anticompetitive practices, is the only search engine that can ever be allowed or Google could purchase many different search engines and create enough of them to stratify the market demand for alternatives. Besides the obvious lack of legality of this situation, at least in the United States, one must ask themselves who would want such a situation to exist. No one could have the capacity to be a search engine entrepreneur in this market or conduct actions under their own ambition, and no one could use any other service to search the internet. Google would have no incentive to innovate outside the fact that they would only have to innovate enough to keep the majority of people using their service. We will get more into the nature of monopolies, their behaviors, arguments for and against, and their creation in the next post. But from this, it is important to understand not only governments ability to regulate and prevent monopolies, but also its ability to create and protect them.  

 

Notes:

  1. Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare. https://stats.oecd.org/glossary/detail.asp?ID=3256

 

Citations:

  1. https://en.wikipedia.org/wiki/Competition
  2. https://en.wikipedia.org/wiki/Competition_(economics)
  3. http://psychology.jrank.org/pages/135/Competition.html
  4. The Information Technology & Innovation Foundation – Economic Doctrines and Policy Differences: Has the Washington Policy Debate Been Asking the Wrong Questions? – Robert D. Atkinson and David b. Audretsch (http://www.itif.org/files/EconomicDoctrine.pdf) 
  5. http://www.jbdon.com/pricing-under-monopolistic-and-oligopolistic-competition.html
  6. http://www.oecd.org/competition/mergers/37921908.pdf
  7. https://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice?language=en