Why do we have competition

But Sherman did not see: any reason for putting in temperance societies any more than churches or school-houses or any other kind of moral or educational associations that may be organized. Such an association is not in any sense a combination arrangement made to interfere with interstate commerce.

Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition.

The law of unfair competition has developed as a kind of Marquis of Queensbury code for competitive infighting. The antitrust community would debate over what constitutes fair and unfair methods of competition, but agree that not all methods of competition are desirable.

The community would likely tolerate price and service regulations in some industries eg natural monopolies where competition is not feasible. For most other commercial activity, however, competition on the merits is the presumed policy. As one American court observed: The Sherman Act, embodying as it does a preference for competition, has been since its enactment almost an economic constitution for our complex national economy.

A fair approach in the accommodation between the seemingly disparate goals of regulation and competition should be to assume that competition, and thus antitrust law, does operate unless clearly displaced. In condemning private and public anti-competitive restraints, competition officials and courts invariably prescribe competition as the cure.

But that is a function of market conditions, not competition itself. Competition itself cannot cause market failures. Economist Irving Fisher over a century ago examined two assumptions of any laissez-faire doctrine: first, each individual is the best judge of what subserves his own interest, and the motive of self-interest leads him to secure the maximum of well-being for himself; and, secondly, since society is merely the sum of individuals, the effort of each to secure the maximum of well-being for himself has as its necessary effect to secure thereby also the maximum of well-being for society as a whole.

Competition policy typically assumes that market participants can best judge what subserves their interests. Suboptimal competition can arise when firms compete in fostering and exploiting demand-driven biases or imperfect willpower. To illustrate, suppose many consumers share certain biases and limited willpower. Competition benefits society when firms compete to help consumers obtain or find solutions for their bounded rationality and willpower. Providing this information is another facet of competition—trust us, we will not exploit you.

The credit card industry provides one example. Some consumers do not understand the complex, opaque ways late fees and interest rates are calculated, and are overoptimistic on their ability and willpower to timely pay off the credit card purchases.

For other credit card competitors, exploiting consumer biases makes more sense than incurring the costs to debias. Alternatively, the debiased consumers do not remain with the helpful credit card company.

Instead they switch to the remaining exploiting credit card firms, where they, along with the other sophisticated customers, benefit from the exploitation such as getting airline miles for their purchases, while not incurring any late fees. This problem, of course, can arise under oligopolies or monopolies. But here entry and greater competition, as one recent survey found, can worsen, rather than improve, the situation: The most striking result of the literature so far is that increasing competition through fostering entry of more firms may not on its own always improve outcomes for consumers.

Indeed competition may not help when there are at least some consumers who do not search properly or have difficulties judging quality and prices … In the presence of such consumers it is no longer clear that firms necessarily have an incentive to compete by offering better deals. Rather, they can focus on exploiting biased consumers who are very likely to purchase from them regardless of price and quality. These effects can be made worse through firms' deliberate attempts to make price comparisons and search harder through complex pricing, shrouding, etc and obscure product quality.

The incentives to engage in such activities become more intense when there are more competitors. Second, after identifying these consumers, firms must be able to exploit them.

But firms, like consumers, are also susceptible to biases and heuristics. In competitive settings—such as auctions and bidding wars—overconfidence and passion may trump reason, leading participants to overpay for the purchased assets.

If repeated biased decision-making is not punished, the problem is too little, rather than too much, competition. Given the cost of losing, it is also illogical to enter a bidding war. But if everyone believes this, no one bids—also illogical. If only one person bids, that person gets a bargain. Once multiple bidders emerge, the second highest bidder fears having to pay and escalates the commitment. Bazerman and Moore analogize their experiment to merger contests.

Competitors A and B, in their example, fear being competitively disadvantaged if the other acquires cheaply Company C, a key supplier or buyer. Firms A and B may rationally decide to enter the bidding contest. Both are better off if the other cannot acquire Company C, nonetheless neither can afford the other to acquire the firm.

Here clear antitrust standards can benefit the competitors. If they both know they cannot acquire Company C under the antitrust laws, neither will bid. Antitrust, while not always preventing the competitive escalation paradigm, can prevent overbidding in highly concentrated industries where market forces cannot punish firms that overbid. Suppose the first assumption Fisher identifies is satisfied—people aptly judge what serves their interest, which leads them to maximize their well-being.

One avoids the problem of behavioral exploitation and perhaps the competitive escalation paradigm. Competition benefits society when individual and group interests and incentives are aligned or at least do not conflict. Difficulties arise when individual interests and group interests diverge. One area of suboptimal competition is where advantages and disadvantages are relative. Hockey players are another example. Hockey players prefer wearing helmets. But to secure a relative competitive advantage, one player chooses to play without a helmet.

The other players follow. None now have a competitive advantage from playing helmetless. Collectively the hockey players are worse off. A recent example is Wall Street traders who inject testosterone to obtain a competitive advantage.

They and society are collectively worse off. Below are five additional scenarios where competition for a relative advantage can leave the competitors collectively and society worse off. Today corporations and trade groups spend billions of dollars lobbying the federal and state governments. Microsoft now spends millions of dollars annually on lobbying. The Supreme Court quickened the race to the bottom when it substantially weakened the limitations on corporate political spending, and thereby vastly increased the importance of pleasing large donors to win elections.

These corporations fear that officeholders will shake them down for supportive ads, that they will have to spend increasing sums on elections in an ever-escalating arms race with their competitors, and that public trust in business will be eroded. A system that effectively forces corporations to use their shareholders' money both to maintain access to, and to avoid retribution from, elected officials may ultimately prove more harmful than beneficial to many corporations.

It can impose a kind of implicit tax. When auditor Ernst and Young recently surveyed nearly chief financial officers, its findings were disturbing: When presented with a list of possibly questionable actions that may help the business survive, 47 per cent of CFOs felt one or more could be justified in an economic downturn. Worryingly, 15 per cent of CFOs surveyed would be willing to make cash payments to win or retain business and 4 per cent view misstating a company's financial performance as justifiable to help a business survive.

While 46 per cent of total respondents agree that company management is likely to cut corners to meet targets, CFOs have an even more pessimistic view 52 per cent. Competition, economist Andrei Shleifer discusses, can pressure companies to engage in unethical or criminal behavior, if doing so yields the firm a relative competitive advantage. Other firms, given the cost disadvantage, face competitive pressure to follow; such competition collectively leaves the firms and society worse off.

But under a shared value worldview, these concepts are reinforcing. The conflict between collective and individual interests arose in the financial crisis. Banks, the OECD described, are prone to take substantial risks: First, the opacity and the long maturity of banks' assets make it easier to cover any misallocation of resources, at least in the short run. Second, the wide dispersion of bank debt among small, uninformed and often fully insured investors prevents any effective discipline on banks from the side of depositors.

Thus, because banks can behave less prudently without being easily detected or being forced to pay additional funding costs, they have stronger incentives to take risk than firms in other industries.

Examples of fraud and excessive risk are numerous in the history of financial systems as the current crisis has also shown. Even for rational-choice theorists like Richard Posner, the government must be a countervailing force to such self-interested rational private behavior by better regulating financial institutions.

One may ask if competition is the problem, then is monopoly the cure. The remedy is neither monopoly nor overregulation which besides impeding competition, stifles innovation and renders the financial system inefficient or unprofitable. The FTC in Ethyl described this divergence: An individual customer may rationally wish to have advance notice of price increases, uniform delivered pricing, or most favored nation clauses available in connection with the purchase of antiknock compounds. However, individual purchasers are often unable to perceive or to measure the overall effect of all sellers pursuing the same practices with many buyers, and do not understand or appreciate the benefit of prohibiting the practices to improve the competitive environment ….

In short, marketing practices that are preferred by both sellers and buyers may still have an anticompetitive effect. What the appellate court failed to grasp is that MFNs—while individually rational—can be collectively irrational. If the buyers fiercely compete, MFNs seemingly provide a relative cost advantage. Why should they uniquely incur the cost, when the benefits accrue to their rivals? Status competition epitomizes competition for relative position among consumers with interdependent preferences.

Either people adapt to their fancier lifestyle, and envy those on the higher rung. Status competition not only taxes individuals but society overall. Status competition has confounded consumers and economists for centuries. John Maynard Keynes, for example, assumed that with greater productivity and higher living standards, people in developed economies would work only fifteen hours per week.

Keynes correctly predicted the rise in productivity and real living standards. This analysis would reveal that the failure to live it is due to a kind of unconscious cut-throat competition in fashionable society. Status competition is often, but not always, detrimental. On the bright side, people voluntarily compete and use Internet peer pressure to change their energy consumption, driving, and exercise habits.

One interesting empirical study sought to understand why academics cheated by inflating the number of times their papers were downloaded on the Social Science Research Network SSRN.

Why the deception? Status competition, the study found, was a key contributor. In all five scenarios, competitors seek a relative advantage that ultimately leaves them collectively and society worse off. This suboptimal competition is not a new concept. Many, however, used a pejorative term, instead of competition, to describe it, such as: a collective action problem, Firms—independent of any competitive pressure—at times impose a negative externality to maximize profits.

For example, electric power utilities, whether or not a monopoly, will seek to maximize profits by polluting cheaply and having the community bear the environmental and health costs. The utility monopoly, for example, may lobby to keep abay pesky environmentalists, but it would not expend resources on lobbying to secure a relative competitive advantage when its market power is otherwise secure.

The previous subsection identifies five scenarios where competition for a relative advantage leaves the competitors and society worse off. Underlying democracies is the belief that competition fosters the marketplace of ideas: truth prevails in the widest possible dissemination of information from diverse and antagonistic sources.

As Bajaj found, industries that seem similar may be far apart on the spectrum—pressures to globalize scooters turn out to be much weaker than those to globalize automobiles. Bajaj may go global in the future, as the Indian market evolves, but it has no need to do so now. Like Bajaj, most emerging-market companies have assets that give them a competitive advantage mainly in their home market.

They may, for example, have a local distribution network that would take years for a multinational to replicate. They may have longstanding relationships with government officials that are simply unavailable to foreign companies. Or they may have distinctive products that appeal to local tastes, which global companies may be unable to produce cost effectively.

Any such asset could form the basis for a successful defense of the home market. Some competitive assets may also be the basis for expansion into other markets. A company can use its access to low-cost raw materials at home, for example, to undercut the price of goods sold in other countries.

Or a company may use its expertise in building efficient factories to establish operations elsewhere. Assets that may seem quite localized, such as experience in serving idiosyncratic or hard-to-reach market segments, may actually travel well. By paying close attention to countries where market conditions are similar to theirs, managers may discover that they have more transferable assets than they realize. The more they have, the greater their chance of success outside the home base. We call a company employing such a strategy a defender.

That sort of company is an extender. If globalization pressures are strong, the company will face bigger challenges. If its assets work only at home, then its continued independence will hang on its ability to dodge its new rivals by restructuring around specific links in the value chain where its local assets are still valuable.

Such a company, in our terminology, is a dodger. If its assets are transferable, though, the company may actually be able to compete head-on with the multinationals at the global level. We call a company in that situation a contender.

We can plot these four strategies on a matrix. For defenders like Bajaj, the key to success is to concentrate on the advantages they enjoy in their home market. In the face of aggressive and well-endowed foreign competitors, they frequently need to fine-tune their products and services to the particular and often unique needs of their customers.

Defenders need to resist the temptation to try to reach all customers or to imitate the multinationals. Because standards of beauty vary so much across cultures, the pressure to globalize the cosmetics industry is weak. Nevertheless, as in other such industries, a sizable market segment is attracted to global brands.

Young people in China, for example, are currently fascinated by all things Western. Instead of trying to fight for this segment, Jahwa concentrates on the large group of consumers who remain loyal to traditional products. The company has developed low-cost, mass-market brands positioned around beliefs about traditional ingredients.

Many Chinese consumers, for instance, believe that human organs such as the heart and liver are internal spirits that determine the health of the body. Drawing on this custom, Jahwa launched a Liushen brand of eau de toilette and packaged it for summer use. Unilever and other multinational companies lack this familiarity with local tastes; they have found their products appeal mainly to fashion-conscious city dwellers. Here Jahwa has taken advantage of the constraints that multinational companies face in adapting Western-designed products to developing countries.

Multinationals typically optimize their operations on a global level by standardizing product characteristics, administrative practices, and even pricing, all of which can hamper their flexibility.

And even if they are, a multinational might damage its global brand by selling its products cheaply. Multinational enterprises bring enormous advantages when they enter emerging markets, but they are also subject to important constraints.

These users typically carried a small amount of the powder in a knotted handkerchief to use outside the home. An advertising campaign was targeted at this segment, and distribution was secured through supermarkets and corner shops.

They argued that the compact would be a test of their ability to develop products for the local market. Only after the chief marketer in the Philippines flew to headquarters and made a personal plea for the product did the company allow the launch to go ahead. The product was a great success; sales exceeded projections by more than a factor of ten.

And even in the Philippines, the company has subsumed the product into a broad line of toiletries instead of promoting it separately. Not only are they closer to their own market, but they are also free to let the market define them. This flexibility is one of a number of advantages that local managers may overlook when they face the prospect of multinationals entering their own market.

For more on the constraints confronting multinational companies, see C. Product formulations, brand positioning, and pricing are often well known long before a multinational launches its brands in a foreign market. This transparency affords defenders both the knowledge and the time to preempt a new brand with rival offerings of their own.

Jahwa quickly launched its G. LF line of colognes, for example, to protect itself from the entry of a global brand targeted at the upscale urban male segment, which Jahwa had ignored. At first, consumers often flock to foreign brands out of curiosity or out of a blind belief in their virtues. But by focusing on offerings that reflect local preferences, Jahwa was able to protect some sales and buy time in which to build up the quality of its products and marketing.

Other defenders have been able to blunt the force of foreign competition by beefing up their distribution network. Grupo Industrial Bimbo, the largest producer of bread and confectionery products in Mexico, seized on that asset when faced with foreign competition. Over the years, Bimbo had built up an extensive sales and distribution force to get its products into tiendas, the ubiquitous corner stores where Mexicans still do most of their shopping.

The company employs 14, drivers who blanket the country with , deliveries daily to , clients. When PepsiCo aggressively entered the Mexican bakery market in , however, those plans were quickly shelved. Their defensive strategy paid off: Bimbo has maintained leading positions in each of its major market segments. In some cases, companies in local industries can go beyond defending their existing markets. With the right transferable assets, these extenders can use their success at home as a platform for expansion elsewhere.

Extenders can leverage their assets most effectively by seeking analogous markets—those similar to their home base in terms of consumer preferences, geographic proximity, distribution channels, or government regulations.

Expatriate communities, to take a simple case, are likely to be receptive to products developed at home. Jollibee Foods, a family-owned fast-food company in the Philippines, has extended its reach by focusing on Filipinos in other countries. Having learned what it takes to compete with multinationals, Jollibee had the confidence to go elsewhere. Using its battle-tested recipes, the company has now established dozens of restaurants near large expatriate populations in Hong Kong, the Middle East, and California.

Similarly, managers can look for countries with a common cultural or linguistic heritage. Recognizing that its programs would have considerable value in the many Spanish-speaking markets outside Mexico, the company targeted export markets in Latin America, Spain, the U. The concept of analogous markets can be stretched far indeed. The company has thrived against foreign competitors by developing its local assets, notably an extensive distribution network. Its paint formulations and packaging practices make for an extremely low-cost product—one that, its managers have discovered, holds considerable appeal in other developing countries.

After its success exporting to neighbors such as Nepal and Fiji, the company is now pursuing joint ventures abroad. Asian Paints brings substantial advantages to these countries. Its managers are used to dealing with the kind of marketing environment there—thousands of scattered retailers, illiterate consumers, and customers who want only small quantities of paint that can then be diluted to save money.

Multinational rivals, by contrast, have built their operations around the demands of affluent customers looking for a wide choice of colors and finishes. Their expatriate managers are used to air-conditioned offices and bottled water that costs more per liter than most customers are willing to pay for paint.

Even after they develop a low-end paint product, the multinationals will still have a long way to go to catch up in emerging markets.

Asian Paints already knows how to speak the language of these customers. If their assets are valuable only in their home country, then the best course may be to enter into a joint venture with, or sell out entirely to, a multinational. Purchasing power is thus increased for all consumers in a market. The mobile telephony and low cost sectors are good examples. Home Competition and you The benefits of competition. Competition improves purchasing power Purchasing power is a major concern in France.

More competition means greater choice and more services Competition is not just a matter of price. New services offered by major retailers To win over new territories and consumers, major retailers are rethinking their business models. In the search for new ways of driving growth, brands are working to take advantage of stores and the internet by developing new services and increasingly personalised customer experiences.

They can also use customer collection Drive for supermarket shopping, to save time. Innovation - competitiveness - growth: the virtuous circle of competition Competition means constant stimulation For established companies, economic competition is an incentive to keep innovating and improve their productivity so they remain efficient and effective and can stay in the race to continue attracting consumers. Competition policy as a safeguard against deviant behaviour Fighting anticompetitive practices is not just a boon to consumers.

New economic models: an opportunity for our economy Competition ensures market access for both businesses and consumers In most sectors, opening up or strengthening competition, with the rapid emergence of new players, leads to a significant reduction in the prices offered to consumers.

Opening up coach transport: positive effects on growth and jobs The opening up of passenger coach transport in France is a good example of how this works. New demand emerged from people who are more sensitive to price than to travel time, such as young people and the elderly.

This growth in demand stimulated the economy upstream — for example in coach construction and driver training — but also downstream through spillover effects in the catering, accommodation and tourism sectors, etc. In a nutshell, it led to growth and employment. Revitalization of existing players The price reduction brought about by competition is not limited solely to new entrants but extends to the whole market. Low-cost flights: the model that revolutionised a whole sector The emergence in a sector of a new business model reshuffles the pack and prompts incumbents to review their strategies.