COMPETITION – YOU MAKE ME BETTER
Michael Fairbanks, author of “In The River They Swim” said the following: “I can predict the future of a developing nation better than any IMF [International Monetary Fund] team of economists by asking one question: ‘Do you believe in competition?’” It is self-evident that when competing with others, individuals are pushed to levels of performance they would not otherwise achieve. The same is true of firms within a market. Without competition, the impetus to continuously innovate and improve is lacking; a higher level of performance is never achieved.
Countries who embrace and encourage competition will reap the rewards. Those countries who fear competition and focus only on its negative effects, often falter and become stagnate.
Market Competition: Pros
There are numerous benefits to competitive markets. When firms have to continuously compete with one another for sales and market share, they are incentivized to do so through the provision of goods and services that are superior to that of their rivals. In this environment, firms must constantly strive to outdo one another in providing new, better, and less expensive goods and services. The firm that does this the best “wins.” The consumer, however, is ultimately the winner in this scenario as their subjective needs and wants are being met at a fair, market price.
Because competitive markets drive down prices, this frees up resources for a consumer to spend on other goods and services. Instead of having to spend the preponderance of their money on good X, for example, they now have money to spend on service Y as well. This bolsters business and employment in more industries across the economy.
Competitive markets also encourage the most efficient and valued use of scarce resources. When companies are not driven to focus on costs due to competition, there is less incentive to maximize efficiency and minimize waste. When a market is competitive, firms only succeed when they use those precious resources in the most effective, valuable way possible and waste is diminished.
Market Competition: Cons
Market competition does result in some parties “losing.” This loss could come in the form of a company bankruptcy. Whole industries may be destroyed. Jobs are lost. People suffer the financial and emotional toll of those job losses. These are examples of the negative effects of competitive markets that should not be ignored or flippantly belittled.
As challenging as these negative effects are, the net, long-term benefits of competitive markets are much greater. New products and services are created and vastly improve living standards. Items can be purchased at a lower price, freeing up money to be spent elsewhere, and consequently boosting revenues in other industries. New industries are born out of competition and create millions of new jobs.
With competitive markets there is great risk but there is also great reward.
Tipping the Scales
Countries can have uncompetitive markets for a number of reasons, many of which involve a country’s national government tipping the scales in favor of one company over another. A national government can do this a number of ways. One way is through providing a favored company with subsidies or tax breaks, while failing to do so for other companies. Sometimes a politically well-connected firm might secure monopoly power within a particular market at the expensive of all would-be competitors.
The most popular methods of stifling competition employed by governments include tariffs, quotas, and other trade barriers. Employed by governments of both developed and developing countries alike, trade barriers are meant to protect domestic producers from cheaper, foreign imports. Western governments, for example, have protected their agricultural sectors from foreign competition for decades. They have done so through very high tariffs. In the end, this not only hurts the majority of their consumers but also young, nascent firms in the developing world.
Likewise, developing nations erect trade barriers in order to protect their “infant” industries from more mature, foreign competition. The idea is that when those native industries have reached a level that rivals their foreign competitors, the government will cease their protective measures and will allow those same native firms to compete with foreign ones. Unfortunately, this latter step usually does not occur as native firms will continually plead for protectionist policies that are politically popular.
While some parties certainly benefit from uncompetitive markets (i.e. politically favored companies or protected industries) there is an economy-wide net loss. Not-so-favored companies never gain much market share and fail. Companies have to pay higher prices for foreign inputs, cutting into their margins. Lastly, consumers will have to pay higher prices for lower quality goods and services. Combined, these effects damage the economy and can hinder a nation from reaching its full potential.
Why Try? Noncompetitive Markets’ Effect on Entrepreneurs
Though there are undoubtedly examples of entrepreneurs striving to build new businesses in environments where competition is stifled and monopolized markets exist, there are many more examples of potential entrepreneurs who simple never tried to realize their vision. Why would an aspiring business owner take any financial risk and try to start a business when their competition receives subsidies and tax breaks from the government? Why attempt something new when the competition’s firms have been granted monopoly power?
When markets are uncompetitive and some select firms receive special treatment, it suppresses the entrepreneurial spirit. Would-be entrepreneurs never even attempt to bring their ideas to market; their fate has already been sealed.
Market competition provides the fertile soil in which entrepreneurs can flourish. When entrepreneurs are allowed to take risks, innovate, create whole new products and services, challenge the status quo, and receive monetary compensation for doing so then entire nations will enjoy the fruits of wealth creation.