Is Competition in Markets always good?
(This post is quite heavily influenced by Peter Theil’s ideas on competition)
Modern economic theorists accept it as an axiom that in a market, monopolies are bad & competition is good. Good for the consumer & good for society. While the case for monopolies being considered bad is pretty well understood and seems rigorous, I feel the case for considering competition as always good deserves closer attention.
Everyone would agree that too little competition is bad. There wouldn’t be any incentive to innovate, it can lead to collusion and monopolistic tendencies. Consumers will have to pay higher prices for inferior services.
But can there also be a thing as too much Competition? Where it is destroying value & actively causing harm to society? I strongly believe so.
I am not an economist, and this is not an economics paper. So there’s no econometrics analysis to back this position. Instead, I shall present my case through logic and examples.
1. Destruction of human capital
The biggest casualty of intense competition is human capital. If too many individuals are involved in a pursuit where only a little value is getting added, then the potential of these individuals is getting wasted. They may be living full lives (thankfully), but society is not benefiting from any of the efforts they are putting in.
One might wonder how this can happen. How, in a capitalist economy, more people can be employed than the value getting generated. Won’t the magic hand of the market set things right?
Well, let me introduce you to a type of auction called the “All-Pay auction” -
“In economics and game theory, an all-pay auction is an auction in which every bidder must pay regardless of whether they win the prize, which is awarded to the highest bidder as in a conventional auction. “ (Wikipedia)
In essence, a participant has to pay in the auction even if they don’t get anything. A classic example of this is college admissions. Every year, millions of students & parents spend huge amounts of time, effort, and money for a handful of seats at a prestigious institute. In Indian Administrative Services, one of the hardest exams in the world, 1.1 million people apply for 180 seats every year. The ones rejected not only have their efforts & money wasted, but they also suffer a psychological setback that can take a long time to overcome.
Can this situation be avoided? The unlying reason seems to be a mismatch between demand from students & supply of seats, not an easy problem to solve. But there can other ways to distribute the supply among the demand. After accessing the students meet a basic qualifying criterion, the distribution can be by lottery. This ensures that the system is fair (it’s not only the rich who can afford the seats) and at the same time, the cost to the students in the form of effort, time, and money spent, is reduced. This is definitely controversial, and you may even say not meritocratic. But it is in fact more egalitarian than the existing system which automatically favors students who can afford better tuition and don’t have to work part-time to make ends meet.
College admissions are definitely not the only place where we see this phenomenon. In fact, any place you see people struggling to make a living because of thin margins, or having their life’s work being snubbed out due to competition, are all such examples. Think of restaurants in your neighborhood, influencers making videos that no one has time to see, people working in hundreds of crypto startups, etc.
2. Destruction of existing market topologies
Stable industries can get disrupted for the worse due to unhealthy competition.
Think of a situation when a new aggregator, flush with cash, makes an entry into an age-old sector. It promises standards of service, healthy competition, and a way to file grievances. It is hailed as a knight in shining armor. It charts its own path, disrupting the existing players. All’s great if this aggregator lives up to its promise. But if its business model is inherently unviable, which may have gone unnoticed because of the coffers of cash, there is no ‘undo’ button. Either this company will start offering a worse service or this company will also go under, leaving behind a vacuum as the old players are already out of business.
3. Reverse transfer of wealth from “have-nots” to the “haves”
Paradoxically, too much competition can cause prices to increase. This happens via price discrimination. Frustrated with competition, companies start vying for high-net-worth customers. Companies start offering better deals on larger SKUs and bigger baskets which can only be afforded by people with more purchasing power. Those with lesser disposable income end up funding these deals since they continue to buy smaller SKUs that are priced higher proportionally.
Many companies will also come up with a loyalty-programs which give coupons & discounts to customers with high spend. These programs have to be funded from somewhere. The company funds these by increasing the non-discounted price tags of all items. These prices are then paid by people who don’t qualify or fail to take advantage of the loyalty programs. Credit Card reward programs are a classic example of this. More premium cards require higher monthly spending, charge a higher commission from merchants, and merchants have no choice but to increase the price tag for all buyers.
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You may ask, why should the government care and why not let the free market work itself out? Governments should care because, like monopolies, this is another problematic market situation. And while monopolies would have the power to change their decisions, the participants in an overly-competitive market are stuck within their environment. No one of them individually has the power to influence the structure of their industry.
But then, competition is needed for innovation & health of the economy. How then, do we draw the line between adequate competition & too-much competition? As with monopolies, the line to draw is thin & tricky.
The Chinese seem to have figured this one out. The government regulated away the multi-billion dollar for-profit tuition industry almost overnight. They felt the industry as a whole was placing undue pressure on students & parents, and society can do without it. While their heavy-handed manner is definitely questionable, it may be worth studying in detail how the decision was made & what are the after-effects.
