Why Competition Alone Is Not Enough

Free marketers view competition as the solution to most if not all problems in the market. If a business is charging too high a price or selling poor quality products then a new business can simply enter the market and take its place. If workers are mistreated or underpaid, then there will be an incentive for competitors to offer better conditions. Competition will cure all problems, prevent excessive profits, exploitative wages, protect the environment, increase your IQ and make you ten years younger (you may think I’m being facetious, but I have yet to come across a problem that libertarians haven’t claimed competition would solve).

However, it isn’t that easy for a new business to start off even with a gap in the market. Ask yourself this, why don’t you set up a new business? For the majority of people the thought probably never even crossed their mind. Even if you wanted too, a lack of capital would prevent you. Few people have the resources to start a new business or are able to convince a bank to lend to them. The second main hurdle is lack of knowledge. In order to run a business you have to know your industry very well which, unless it is a new industry like the internet, takes years or even decades. By that time you are probably well established in the system with little reason to leave or unwilling to take big risks anymore. There is the final and biggest reason, namely, a business is an enormous gamble. Given the extremely high failure rate of new businesses, it takes confidence bordering on delusion to set up a new business, certainly something no rational person would ever do.

Even you do set up a new business, it isn’t as simple as just offering a lower price and reaping the rewards like most economic textbooks would suggest. New businesses have far higher costs than established ones such as purchase of equipment, premises and training of staff. Nor would they benefit from the economies of scale or efficiencies and skills gained over years of trading that more established businesses would have.  If anything a new start up would have to charge more for a lower quality service until they are established (that’s why they have such a high failure rate). All new businesses are loss makers when they begin; it takes a long time (if ever) for them to turn a profit.

Nor should we assume that consumers will automatically flock to the newcomers. Every new business faces the difficult tasks of convincing its target market that it even exists. A new business is going to be off the beaten track, away from the main streets with the highest rents. You may run the best business in the world, but if people don’t know it exists it’ll be all for naught. Let’s face it, if a new laundrette or hat shop opened, would you know? Is that something you would go looking for? Then there is the task of overcoming human psychology. People generally don’t like venturing into the unknown, the uncertain, even with simple things like new products. They build up a familiarity, a comfort with existing names and brands that makes them reluctant to try something new. Why risk trying a new service or produce that could be awful when the one you have is doing fine (even if it isn’t great). If it ain’t broken don’t fix it. People are creatures of habit and make far less decisions and choices than economists think. A lot of the time we are simply on auto-pilot, repeating the same thing we do every day, buying the same products and going to the same shops. This is perfectly understandable, for if we tried to decide on every possible option for every possible product on the market every day, our heads would simply explode.

Nor is there any hope of competition alone solving every problem of work. It is said that everyone is paid a wage equal to their productivity for if they weren’t they could just leave and join another company. However, the strange thing about skills is how job specific they are. Most jobs involve working within specific procedures with specific people in a way that is very different in every firm. Being good at your job often means knowing who to talk to or where to go within the company. In this sense most people have a large amount of human capital built up within their company comprised of year’s worth of contacts, networking, favours and shared experiences. My current job for example, didn’t require any specific skills (beyond use of a computer) and almost everything I’ve learned is company specific. If I quit and went to work for a rival company, I’d have to start from scratch. In this sense, the labour market where companies compete for staff doesn’t exist. It doesn’t really matter what competitors offer, no proper comparison can be made.

So in this sense people may be highly skilled at their current job, but were they to leave their company, they would have little to show for it. Skills are not just intrinsic qualities we have; they are also dependent on our environment. Add to this the fact that almost no employees search for jobs if they have one and thus are unaware of other job openings, and it is easy to see why so few people quit to join a competing company.

There are even the non-monetary aspects to a job (it is frustrating how libertarians think everything is about money). Even if someone is underpaid in their job, leaving would mean losing their friends, possibly their romantic relationships, even things as simple as a place close to work. We spend so much time at work that it is a major part of our world, even our identity. Being in a place for months or years makes it feel natural, almost like somewhere you belong. To give this all up and plunge into the uncertainty of an unknown business full of strangers is a leap of faith rarely taken. A sense of loyalty develops among most people for their workplace. We are not mercenaries who will abandon our employer at the drop of a hat. Many people feel that the employer trusted them enough to give them a job and so they should return the trust. To leave, especially to a rival, can almost seem like betrayal.

So when libertarians claim that workers can easily secure the highest wages, best working conditions, longest holidays, most flexible schedule, fairest bosses, most agreeable overtime, best atmosphere, least discrimination and all round best job just through competition without the need for government intervention, they are not seeing reality, but merely their fantasy. They are just too many variables for people to choose (and the fact that people usually take the first job they are offered and have little choice in their working conditions). Competition only works if companies actually compete for staff and workers can genuinely threaten to leave and go elsewhere, neither of which happens very often in the real world. In reality there are large differences in prices for the same or similar products and wide variances in wages in the same industry. These differences would have long since vanished if competition alone was enough for an efficient market.

Likewise to expect that we can abolish government laws regarding the conditions, quality, safety of products, the workers who make them and consumer protections, because “competition” will save consumers and lead them to the promised land is also fantasy. They are too many variables, too much choice, so people fall back on habits and the most convenient option. Competition alone would only lead to the most efficient market if before every purchase; every person compared the price of every product with the hundreds of other products in competition with it sold in dozens of competing shops. Then they would have to repeat it to find the best quality and a dozen other intangible and immeasurable features and weigh them accordingly. Then repeat this for every transaction. The only way this would work would be if we were dealing with computers not people.

When I was looking for work, I took the first job offer I got. I didn’t wait around for something else or haggle over my contract. Since I got a job, the thought of looking elsewhere has hardly crossed my mind. When I cracked the screen on my phone I went to the first repair shop I found. I didn’t scour the streets comparing prices all over Dublin. In fact, I didn’t even check with a second repair shop next door. When I see a book I like, I buy it. I’ve never compared prices with another bookshop or online in my life (which considering the amount I spend on books says a lot). I do my food shopping in the same place every week. Libertarians tell me that competition of the market will give me the best life possible, but people don’t have the time, effort or the dozen other requirements to make competition alone work.


Filed under Economics

5 responses to “Why Competition Alone Is Not Enough

  1. Maybe next time you can just ask a libertarian whether they themselves seek out cheaper and better products every time they have to buy something.

  2. The simple-minded never look much beyond the concepts that stir them like free markets, “freedom” and religious salvation and tend to resort to name calling when confronted with the negative realities of their fantasy

  3. jamesbradfordpate

    Reblogged this on James’ Ramblings.

  4. As always, brilliantly argued. I wish more people were this thoughtful, even to the point of reading something like this to better understand the world around us. I have made a similar argument regarding “school choice” and “charter schools” in the U.S. Everybody thinks that having a “choice” of schools is a good thing, but in reality, how many schools will anyone have to choose from? And does it benefit anyone to have schools that fail (as a consequence of competition)? We are finding out right now … the hard way. Does it benefit anyone to have multiple schools with unused capacity ( a necessity to have competition)?

    All of these ideas confuse the dividing line between competition and collaboration which is the definition of one’s “in group.” You compete with “outsiders” and collaborate with insiders. So, all of a sudden, our children are “outsiders” in our culture?

  5. Pingback: The Power Of Employers | Robert Nielsen

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s