When is competition beneficial?

Over on DanThinksAbout, in a discussion of the public and private sectors, Dan mentions the benefit of markets: that “competing firms innovate in the hope of getting ahead, and successful innovations make the firms that adopt them successful”. This left me thinking about the nature of competition, and of how it leads us to expend our effort. When it is beneficial?

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When we think about competition in markets, we tend to think about Asus, Dell and Lenovo all competing to build better laptops at lower cost, and the resulting downward pressure on prices — which is obviously good for consumers.

But competition can itself become a runaway process. Think about male peacocks competing for the attention of females. Peacocks have become genetically locked into the idea that a big, showy tail is sexy, and a male without such a tail with never find a mate — so the small-tail gene will never propagate. As a result, every male peacock has to devote a crazy proportion of his developmental effort into growing a tail which is a grotesque impediment for most purposes — a positive hindrance to survival in the wild, and the cause of peacocks’ very poor flight performance.

Once a competitive area like peacock-mating becomes established, it’s effectively impossible to opt out of. But the same is true of much commercial competition, too. Consider the market for laundry detergent. There may be legitimate differences in performance between, say, Persil and Ariel; but most people will lack the expertise to benefit from, or even detect, those differences. So the two brands compete on advertising instead of quality.

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The result is that we have thousands of people working for both of these brands (and many others) doing work whose net value is zero. That is, if those working for Ariel get the upper hand, they benefit their company, but at the cost of harming the Persil company; and vice versa. (The market in washing powder isn’t going to grow. People need as much as they need, so selling the stuff is a zero-sum game.)

That’s not a good outcome for society. This toxic form of competition has taken talented, educated people, and set them working directly against each other. If they both stopped doing what they’re doing, then the effect on the economy would be a significant positive (i.e. no effect on washing-powder sales, but lots of extra people released into the work-force to do something of intrinsic value). And if stopping a thing is a positive, then continuing to do it is a negative. (This is just one of the reasons I could never take a job in advertising washing powder.)

So: from society’s perspective, all those people in washing-powder advertising should be freed from that valueless task and released into something more useful. But of course that doesn’t happen — because from the perspective of the Persil company, money spent on advertising is money well spent, and recoups itself in sales that would otherwise be lost to Ariel. And vice versa.

What we have here is, in fact, a tragedy of the commons: the rational behaviour for individual actors is one that has a negative outcome for everyone; but no-one can stop it because it would leave them at a competitive disadvantage. (But this is much worse, because in this case the resource that is being squandered is not pasture land but human effort.)

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What do I conclude from all this? I really don’t know. I’m certainly not advocating for centralised state ownership of the means of production — an outcome that would probably be positive for washing-powder manufacture, but would certainly be disastrous for laptop production. We know from the experience of far too many communist states how this turns out.

I think what I’d like is to see a decrease in what looks like blind faith in markets. This is particularly prevalent in our present UK government (and, to be fair, the one before it, and the one before that). It seems to be taken as axiomatic that competition is always good; but it’s not. I’d like our politicians to carefully consider each case on its own merits before deciding that (for example) private firms should compete for the right to subcontract medical procedures from the NHS. Competition of this kind might be beneficial; but it might be harmful. I’d like to get rid of the blind assumption that it must be good because it’s competition.

In short, for each individual case where competition could be introduced, we need to ask whether it’s more like the case of competing laptop manufacturers (good), competing laundry detergents (bad) or competing male peacocks (disastrous for most purposes).

22 responses to “When is competition beneficial?

  1. But in fact, washing powder has got much better over time, due to competition. Today’s formulations work much better and at much lower temperatures than those from 50 years ago. They tend to proceed in occasional large jumps instead of the small incremental improvements that competition drives in things like laptops, but they’re still there, and they’re still driven by competition. So washing powder is perhaps a bad example.

  2. Interesting. It’s not actually the example that I had in mind when I wrote this, but I changed from my original because I used to know someone who worked in advertising the product I had in mind, and didn’t want to alienate him or her if he or she ever saw this article :-)

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  4. You’re missing something. Specifically, let’s assume that both Ariel and Persil are maximally effective and efficient washing powders, so the only competition possible between them is not on something useful, like lower prices or better performance, but on advertising. And then, as I understand it, your claim is that therefore it would be more efficient for there to be a single, maximally efficient brand instead.

    So what you’re missing is: why, in a world with one brand of washing powder, would there have been any incentive for that brand to become maximally efficient? Why make any improvements to your product, if your customers have no choice but to keep buying it from you?

    So competition is necessary to get to the state of maximal efficiency. And once you’re there, without competition or the threat of competition, where is the incentive to stay there? If all washing powder were produced without competition (the leading brands merged & no new players could enter the market) then the incentives would be to raise prices, or to make washing powder that was less effective but cheaper to produce.

    That’s why we need competition in washing powder, and everything else: to provide the incentive to improve the product and drop the price, and not to do the reverse when possible.

  5. Well, P, I am not saying there should only be one brand of washing powder! I am saying that the specific form that competition takes in the present market is human effort down the drain — and that, based on that example and others, governments should judge on a case by case basis whether introducing competition would be helpful or harmful, rather than (as they often seem to do) simply assuming a priori that competition is good, because it’s competition, which is good.

    (The negative outcome of there being only kind of washing powder is probably a big part of the reason that communism has failed so consistently.)

  6. I couldn’t agree more. I feel that people have come to rely way too much on the free market, especially since the fall of the iron curtain. As you say, in some areas it makes very little sense and it indeed actually doing a lot of damage.

  7. governments should judge on a case by case basis whether introducing competition would be helpful or harmful

    The point is that you cannot eliminate competition without also eliminating the incentive to improe efficiency, quality and service. That applies to everything: washing powder, healthcare services, everything.

    There is no ‘case by case basis’: without competition, without the threat that if you don’t reach and maintain high standards you will go bust, there’s no incentive to reach those standards.

    Yes, some of the forms competition takes might be wasteful. But there is no way to elimonate those without also losing the good points of competition, and those good points are the only things which provide the inventive to make things work.

  8. There is no ‘case by case basis’: without competition, without the threat that if you don’t reach and maintain high standards you will go bust, there’s no incentive to reach those standards.

    That, right there, is a very nice example of the kind of “blind faith in markets” that I was talking about.

  9. That, right there, is a very nice example of the kind of “blind faith in markets” that I was talking about.

    So what incentive do you think exists to reach (or maintain) higher standards, in the absence of competition?

  10. Are you honestly unable to imagine any other reason to want to do things well, other than that you need to do it better than other people?

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  12. Are you honestly unable to imagine any other reason to want to do things well, other than that you need to do it better than other people?

    People do what they have incentives to do. That’s how the world works. It’s why, for example, the communist economies couldn’t survive: because the incentives were all screwed up For example, people were rewarded for producing as many shirts as they could — regardless of whether anybody needed them, or of their quality. So millions of unwearably awful shirts were produced, doing nobody any good, because that was the incentive.

    If there is no incentive to improve a product, that product will not be improved. If there are incentives to make a product worse — say, there is a monopoly and so quality can be reduced while keeping the price the same — then that product will become worse.

    And if there is an incentive do meet a target, that target will be met, even if it means the overall quality of the service suffers; see the many NHS targets of the last twenty years.

    This is how the world works, how it has always worked. You can’t just wish it different.

  13. You are describing one of many ways that the world works, and reifying it as the One True Way. Van Gogh didn’t create his paintings because he was forced to do so by competition. I don’t write palaeontology papers because there is a financial incentive (quite the reverse). I am sure that you, too, do many things for reasons other than incentive schemes imposed by either governments or markets.

    The world is complex place. Economists might wish it was simple, but it’s not. As a wise man once said, you can’t just wish it different.

  14. You are describing one of many ways that the world works, and reifying it as the One True Way

    Every time anyone has tried to build a system based on any other assumption about how the world works (eg, the idea that in an anarchic commune people might spontaneously self-organise to make sure all the tasks that are required for the thing to operate are done), it has failed, often spectacularly.

    By contrast, the one system which takes as its assumption that people will do what they are given incentives to do, and then tries to work out how to make those incentives align with creating the best stuff, ie market economics, has succeeded spectacularly in raising the living standards of everywhere it has been tried to levels unimaginable

    To claim that this is not how the world works is like claiming that gravity just describes one way the world works and that, as the world is a complex place, water might suddenly start flowing uphill.

  15. You’re reminding me of G.K. Chesterton’s comments on H.G. Wells et al:

    ‘And the weakness of all Utopias is this, that they take the greatest difficulty of man and assume it to be overcome, and then give an elaborate account of the overcoming of the smaller ones. They first assume that no man will want more than his share, and then are very ingenious in explaining whether his share will be delivered by motor-car or balloon. ‘

  16. Every time anyone has tried to build a system based on any other assumption about how the world works …

    That’s not what I’m doing at all — in fact it’s almost the opposite of what I’m doing. I’m rejecting the notion that any assumption about how the world works can give us good results all the time, because the world is more complex than any such assumption allows for.

  17. I think P hit on it—competition is how it got there and what keeps it there.

    But you’re right, it’s not an efficient use of the talents of all involved. Redundancy is part of the cost of this system.

    Why it works though is that it’s a simple way to take information in from millions of parties and continuously adapt. Money is an elegant abstraction that has given us a way to decentralise the allocation of our efforts as it captures input from everyone who makes a purchase decision. While we might think we can cherry-pick ways that this or that can be done better, it’s very hard to anticipate the knock-on effects of, say, nationalising the production of washing powder.

    However, it is definitely a mistake to revere competition as a mythical force or consider the market economy to be an ineffable manifestation of humanity’s will—because it’s not. It’s just another imperfect tool we’ve built for ourselves, this one happens to be closer to social mechanisms like laws or religion than to a hammer but a tool just the same. Indeed, it’s a direct consequence of states and rule of law as those are what enable the framework of property rights that the market plays out on.

    So regulation isn’t the opposite of markets but indeed the source of them. And we tweak it all the time with taxes and treaties and whatnot. We research flaws and implement workarounds such as the break up of abusive monopolies, laws against various sorts of price fixing and collusion and attempts to include things that are currently external to the market (like damage to our shared environment).

    Of course that’s all contentious and even policy changes that are widely considered a good idea are hard to implement because the balance of power is held by people who the status quo works quite well for.

    Given that change is hard, I don’t know that reducing overlap of efforts is going to be top of anyone’s list. Do you have any proposals in mind on an elegant way to identify and reduce redundant competition? I think to some extent it happens naturally in mature markets, don’t they tend to be dominated by very few, very large companies? Companies tend to grow or die and there are many inherent advantages to being an incumbent in a market. If there isn’t anything new for upstarts to use as a competitive advantage won’t this attrition keep the number of participants fairly low? Since the remaining companies are able to compete with each other they’re probably also similarly efficient at what they do. If forced to merge, you’d mainly get rid of some admin and executive staff but probably need about the same number of factories and soap trucks at the end of the day.

    That extra few sets of leadership each negotiating their own supply chain isn’t just the price we have to pay to avoid the peril of operating this by fiat. It makes our soap production resilient. Maybe Persil has a breakdown in labour relations. Ariel is still going strong! Oh, it turns out their main ingredient we all thought was totally safe is in fact horrible and they need to redesign it from scratch. Luckily Persil has sorted their labour troubles and their recipe isn’t reliant on that chemical. Diversity isn’t just for ecosystems.

  18. The next time someone argues about economic efficiency or the necessity of competition, ask just how many women have nursed a baby for efficiency or competitive reasons. Then consider how far our kind would have gotten if no women ever nursed babies. If you want to cut closer to home, consider sex and ask how much sexual activity is driven by a drive for efficiency and profit maximization. You’d imagine premature ejaculation would be a good thing as it saves time and energy that could be better spent doing something else.

    Biologists deal with this all the time. If you are thinking about optimization, what the f— are all these creatures having sex for? The answer seems to be related to P’s argument about competition resulting in wasteful stasis or heading down apparently blind alleys, but in the long haul sexual reproduction drives innovation.

    The free market is like fire. Few things are better than fire for staying warm, cooking food, providing light and so on, but one doesn’t set fire to one’s house when it gets cold in the evening. Fire needs careful, constant control. The free market is a powerful force, but it needs to be heavily regulated to get what you want from it.

  19. I’d throw in that, in my experience, the people coming up with package designs and advertising jingles for washing powder do derive personal artistic satisfaction from their work. They do see themselves as Van Goghs of the supermarket aisle, so to speak, and don’t see their work as a waste of their lives.

    I doubt that the Assistant Regional Bureau Manager of Making Sure that Washing Powder Packages Are Uniform Government Grey would derive as much joy from their life’s work.

    Relatedly: the premise is that male peacocks being beautiful is a waste of resources, and instead they should be less attractive but better flyers, like pigeons? Says who? Do you think God likes pigeons much better than He like peacocks? It might be the other way around.

    It seems a bit odd to on the one hand say, “Bloody peacocks, what good are they, they can’t fly well,” and on the other hand hold up Van Gogh as a model for how people should behave. Think of all the resources Van Gogh wasted painting when he could have been training to be a better long distance runner!

  20. Lots of interesting thoughts there, j, thank you. You ask: “Do you have any proposals in mind on an elegant way to identify and reduce redundant competition?” Sadly, no. I am only just coming to understand what the problems are, and really not in a position to offer informed suggestions. (I may fix that over the next year or so, though.) All I am trying to do right now is undermine what I think is a common and very unhealthy philosophical or even religious position, which is the idea that all competition is always good because it’s competition, which is good.

  21. Dave Barry makes the point in one of his books that swift ejaculation is advantageous from an evolutionary (i.e. gene-propagation) perspective, but that few women, when asked what they’re looking for in a man, reply “I’m looking for a real fast ejaculator”.

    The market=fire analogy is a nice one.

  22. I’m wondering if P pays his/her family members for meals cooked, demands fees from them for cooking, or demands reimbursement from children once they are grown up? After all, without that, there’d be no incentive to do those jobs well!

    (In fact, the thought of doing any of those things on a financial basis is almost certainly repugnant. Not only is an incentive-based scheme not the only way we have of rewarding effort and organizing our affairs, it’s not even the principal mechanism, not in any society.)

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