By Connie Lin
Imagine two different track races. In the first race, there are 100 competitors who are all Olympic athletes. In the second race, there are 100 competitors, but all of them are obese yet were eligible to enter because of connections with the coach. Which race has more competition?
They both have the same number of competitors, but obviously, that does not mean both races are equally competitive. The question that should be asked is not “Which race has more competition?” but rather “Which race has better competition?”
Competition in Different Market Structures
Different market structures have traits that result in different types of competition. Not every industry can have “perfect” competition in a way that is defined by a typical economics textbook. By definition, the fashion industry has “imperfect” competition. “Perfect” competition involves companies that produce homogeneous products. Think orange-growers or pencil-makers. In contrast, the fashion industry produces varying products, a trait of imperfect competition. However, that does not mean that the fashion market is insufficiently competitive.
So, what does it really mean to have better competition? According to economist Friedrich Hayek,
Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market.
In other words, competition is beneficial because it provides accurate information to consumers about the best producers by allowing efficient producers to thrive and expand while inducing the inefficient ones to eventually leave the market, shifting scarce resources to the more efficient producers.
Therefore, the number of firms in a market does not alone determine the level of competitiveness in an industry. The number of competitors should be the result of the height of the barriers to entry and the efficiency of individual competitors. Quality competition comes from the latter of the two; low barriers of entry increase the quantity of competitors, but the more efficient individual competitors gain market share faster, thereby reducing the original quantity.
Quality of Competition
Since the quality of competition is determined by the degree of accuracy to which the market can signal to consumers where the best producers are, attempts to artificially increase competition through antitrust laws miss the point of competition, for they keep inefficient competitors in the market and squander the incentive for superior producers to expand and innovate since they will be broken up eventually. The quality of competition is lowered whenever market signals are distorted, even if the quantity of competition increases superficially. So what should we do about monopolies? It depends on the type.
Competition naturally occurs as a profitable industry entices new producers to enter, and the companies that generate the most value for their customers acquire a larger share of the market. Natural monopolies, as in those that achieve their status purely by consistently beating the competition without government favoritism, are extremely rare.
Even if natural monopolies form, they rarely endure since economies of scale also create the negative side effects of bureaucracy and stagnation, which will cause them to lose their monopoly status. These monopolies are not anti-competitive because they only dominate the market so long as they serve the consumer better than any possible competition.
The malicious type of monopoly or oligopoly forms when a business or a group of businesses seek to protect their position of dominance not through competitive merit but through government assistance. This is called cronyism, where companies extract favors in the form of subsidies, more regulation on competitors, tariffs, and other tactics to weaken the competition. The more the government intervenes in the economy, the more vulnerable institutions are to cronyism due to regulatory capture. Competition is stifled by laws intended to increase barriers to entry in order to protect existing enterprises.
Companies that encourage these types of regulations will limit new entrants to the market. These types of monopolies result in net harm for society because the state-sanctioned monopolies have no incentive to maximize quality and minimize cost. Improving competition in modern capitalism means reinstating the values of laissez-faire capitalism, where the consumers, not the government, become the sole determiner of a firm’s success or failure. The best way to improve competition in modern capitalism is to create an environment that lowers the barriers to entry for new firms as much as possible, not by preserving the existence of present, inefficient competitors.
Regulation Increases Barriers
Excessive regulation should be curbed because it protects larger players from competition with smaller, more innovative companies. Regulation is commonly viewed as an antidote to abuse by private corporations, but in fact, larger companies frequently lobby legislators to increase the regulatory burden, which results in higher barriers to entry for the sector they lobby to control. A heavy regulatory burden tasks emerging enterprises with high costs of compliance that often threaten their survival.
The pharmaceutical industry charges absurdly high prices due to certain barriers to entry that are already inherent to that sector, such as research investment. Excessive regulations only exacerbate the problem by making entry costs for new manufacturers even higher. For the handful of companies that are able to afford the costs of compliance, those costs are simply added to production expenses and passed down to the consumer.
On the other hand, the information technology sector is comparatively less regulated. The tech industry had lower barriers to entry with less extensive government licensing requirements. As a result, cutthroat competition resulted in falling costs and rising quality. In the early 1980s, the cost per megabyte was between $100 and $200, but today that price is less than a cent.
That is not to say that cronyism is absent in the tech industry. In fact, it is ever-increasing. When government policy is used by one company to gain a competitive edge over the others, that company leaves its competition little choice but to follow suit by also beginning to seek influence with regulators. In the early days of Microsoft, the company invested little in political lobbying—until it was hit with an antitrust lawsuit in 1997 that severely weakened its standing. As a result, Microsoft dramatically increased spending in order to compete with rivals like Sun Microsystems and Netscape, which had already invested heavily in lobbying. From that historical lesson, tech companies are now lobbying the government more than ever. Google now spends the most on lobbying. Regulatory agencies often become dominated by the very industries they are charged with regulating.
Competitive Free Trade
Reducing barriers to free trade can also improve competition. Steeply priced non-patented pharmaceuticals, like Daraprim, a drug that treats parasitic infections in infants, went up in cost from $13.50 to $750 in 2015, when it was bought by Turing Pharmaceuticals. This drew public outrage and calls for more regulation. However, the problem has a much simpler solution: free trade. Daraprim is much cheaper in the EU and in India, where it is estimated to cost only five cents. However, the FDA creates regulations that reduce foreign competition by requiring imported drugs to undergo the same demanding and costly approval process that also prevents more domestic firms from being able to sell Daraprim.
Modern capitalism has strayed away from the classical liberal view of capitalism through increased government intervention in the economy, which has resulted in cronyism. The time and money that corporations now feel obligated to spend on lobbying regulators are wasteful because they constitute resources taken away from innovation.
Merely counting the number of competitors in the industry or evaluating the size of a company is a shallow and inaccurate way of assessing the quality of competition. Competition is pointless if it is coerced; good competition comes from freedom. Instead of propping up companies that would otherwise not exist without government support, we need to cultivate an economic environment with lighter regulatory burdens and fewer trade barriers so the entry of new competitors will not be discouraged.
Connie Lin is a student who is fascinated by international affairs, politics, and the economic side of any issue. Follow her on Twitter.
This article was sourced from FEE.org