Competition in Theory and Practice

Terry Burke,Angela Genn-Bash,Brian Haines

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351333702
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

What is the role of competition in economic activity? How can it be understood? How can it be regulated? Competition is a buzz word in economic policy and in commerce. Yet it is given widely varying roles in different models and is viewed in very different ways by different schools. This book, published in 1991, provides a clear exposition of the major theoretical approaches to competition and an assessment of competition policy in the major economic powers.

1 The Dilemmas of Competition

WHAT DO WE MEAN BY ‘COMPETITION’ ?

The concept of competition carries within it the notion of rivalry for the possession of a not easily divisible object or the achievement of an exclusive outcome. So we have a picture of more than one person, or group of persons, wanting, at the same time, something that cannot readily be shared. Each contestant tries to gain the desired object, while denying it to the rivals.

At this early stage in our discussion of competition we assume away a number of important real-world features which, deriving from technological considerations, are likely to modify substantially the competitive process. These excluded ideas would include problems of access to knowledge and the existence of economies of scale and of minimum efficient sizes for plants. These factors would tend to reinforce rather than weaken any tendencies towards the concentration of capital and centralisation of ultimate control.

HOW TO READ THIS CHAPTER

In this chapter we set out to make you think afresh about competition. You may believe that competition is the essential ingredient, the vital yeast, which makes for economic growth and efficiency. Or you may feel that competition is an integral part of our alienation from our surroundings, from our work and from our fellow human beings, our co-existents.

Whatever your perspective, read this chapter in an active way – using it to challenge your own ideas. Use it to get you thinking about competition – its place in business, in the provision of goods and services, in our own lives and in those of our fellow citizens.

INTRODUCTION

The idea of ‘competition’ has had, for two centuries or more, a powerful influence on the way we think about our society, the way we organise things and on the ways in which we conduct our own economic and personal lives. There is, however, little agreement on what competition really entails – let alone whether it is a good or bad thing. To help organise our thinking on competition we identify five key issues, which we present in the form of five paradoxes of competition and invite the reader to explore the underlying ideas, learning to spot common oversimplifications and contradictions.

We then pay a visit to the mythical land of Competania, where a freedom to compete is everyone’s birthright, yet where slowly over the decades this right is reduced by the build up of legal case law until the re-establishment of competition requires positive political action. The purpose of this section is to surface links between rights, the law and political actions. We then extend this analysis to encompass neighbouring Rivalaria.

In the final section of this opening chapter we present the metaphor of a great game to help organise our thinking and resolve some of the apparent contradictions of competition. Businesses and individuals are said to be playing in a game, with a complex set of rules, in which they can adopt defensive or offensive strategies, according to the relative costs, risks and rewards.

The chapter concludes with a proposal for a descriptive model linking our basic drives to our economic behaviour and thence to the conduct of business and government.

FIVE PARADOXES OF COMPETITION

1. Competition is the pursuit of happiness; through competition individual selfishness leads to universal happiness.

A selfish shopkeeper in order to attract trade gives a better service than the next shop. If all shopkeepers are equally selfish, then the shopper will get the best of all possible deals.

2. Competition simultaneously creates wealth and poverty – competition has made possible the enormous material progress of the past 200 years, by unlocking the energies of society, yet it has spelt misery for the tens of millions of workers involved in the creation of that wealth.

Historically, Britain, and northern Europe, saw a basically low-density rural population transformed into a high-density urban one, in order to provide the concentrated workforce required for the new industrial factories. This process, which took place under conditions of free competition, created a new working class. This new class suffered appalling depredations, while the overall material wealth of the country doubled and redoubled.

3. Competition means that you as a person can have more but be less. What does it profit a man if he gaineth the whole world yet suffer the loss of his soul?

In any competition, winners are rewarded with prizes. In Western society everyday status attaches to the external trappings of wealth – the house, the car, etc. We are all too often judged on what we own, rather than on what we do.

4. Businesses compete in order to reduce competition; modern economic society is built through a process of competition rather than within a framework of competition.

In a new market aggressive firms go for market share. Firms are soon sorted into winners who grow larger, and losers who, in time, will exit from the game. After a time there will be so few players left that there will be little trace of the original competition.

5. In the sphere of politics, while both the right and the left have a rhetoric for competition against monopoly profits, neither tries very hard to translate words into actions.

Politicians, to the right of centre, base their philosophy on the virtues of competition, yet are funded by firms and individuals enjoying super-normal profits. Similarly politicians of both left and right, whatever they say about competition, need the efficiency that comes with scale. On the left politicians may have a preference for collective endeavour, yet dislike collusion between big businesses.

COMPETITION AND PURSUIT OF HAPPINESS

The promise of unlimited progress has sustained the hopes of generations since the beginning of the new industrial age. Industrialisation has progressively involved the substitution of mechanical and electrical energy for animal and human energy and more recently for human computational powers. In this process of industrialisation, competition has dissolved the feudal chains and, at least for the upper, and possibly the middle, classes it has augured in an age of apparent personal freedom. Production plus freedom might be said to be the twentieth-century formula for unrestricted happiness.

Modern industrial society is distinguished by being more explicitly competitive than its feudal and mercantalist forerunners. Business, as a specialised function, is more clearly marked off, or differentiated, from other economic, social and political activities.

The rights of individuals as against those of the community, are more sharply defined in modern Western states as opposed to the more traditional pre-industrial societies. Individuals make decisions for themselves, seeing themselves largely independent of custom. In these choices individuals try to maximise their own happiness subject only to the limits of time, money and opportunity.

Any standard intermediate economics textbook will demonstrate that this budget-constrained pleasure maximisation by individuals, with the associated profit maximisation by firms, leads not only to consumers getting the goods and services they want at lowest possible prices, but also to the most efficient distribution of resources throughout the economy. It can also be shown that the volume and the growth of goods and services produced in such an economy will always be at a maximum. The essential precondition for this happy state of affairs is, however, that the world is one of full and untramelled competition.

In a famous quotation Adam Smith (Wealth of Nations, 1776, pp. 26–7, l.ii.2) makes the point that we are driven by self-love to serve others: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’ The ideas of Adam Smith, and others, are explored in the next chapter which looks at some of the seminal ideas concerning competition.

The essence of our first paradox of competition is that it is selfish behaviour, not altruism, which leads to universal happiness.

WHO PAYS THE COSTS OF COMPETITION?

Alfred Marshall, the late Victorian and Edwardian economist, whose work dominated economic thinking for a generation or more, in his Principles of Economics (Marshall, 1920, pp. 4–8) mused on the negative connotations evoked by the word competition, which had gathered about it an evil savour, and had come to imply a certain selfishness and indifference to the well-being of others.

However, he saw that competition released energy and encouraged resourcefulness. It led to a cheapening of commodities and acted as a curb on excessive profits. Marshall suggested the term ‘competition’ was badly suited to describe the characteristics of modern industrial life. He proposed replacing it with ‘economic freedom’; an idea still worth pursuing in order to add a new dimension to the politics of competition policy.

However, he also saw the sudden increase in economic freedom associated with the early days of the Industrial Revolution as the source of much evil (Marshall, 1920, p. 621).

Now first are we getting to understand the extent to which the capitalist employer, untrained to his new duties, was tempted to subordinate the wellbeing of his workpeople to his own desire for gain; now first are we learning the importance of insisting that the rich have duties as well as rights in their individual and in their collective capacity; now first is the economic problem of the new age showing itself to us as it really is … But however wise and virtuous our grandfathers had been, they could not have seen things as we do; for they were hurried along by urgent necessities and terrible disasters. We must judge ourselves by a severer standard.

These concerns led Marshall to conclude (1920, p. 622) that ‘gradually we may attain to an order of social life, in which the common good overrules individual caprice … unselfishness then will be the offspring of deliberate will; and freedom: a happy contrast to the old order of life in which individual slavery to custom caused collective slavery and stagnation, broken only by the caprice of despotism or the caprice of revolution.’

So in Marshall we find that while competition is a liberating force, which has enabled us, to our material benefit, to break out of the prison of tradition, it needs to be complemented by a conscious and deliberate concern for the common good, presumably obtained through a political rather than an economic process.

Writing a generation earlier Karl Marx and Frederick Engels in the Communist Manifesto (1844) point to the importance of competition to the new bourgeoisie who in ‘scarce one hundred years has created more massive and more colossal productive forces than have all preceding generations together’.

Yet, according to Marx and Engels, the modern labourer instead of rising with the progress of industry sinks deeper and deeper through competition into isolation and poverty (Marx and Engels, 1844, p. 48). Their solution was for the individualistic competitive capital owning bourgeoisie to be replaced by the proletariat, who would apparently centralise production in the hands of the state.

The essence of the second paradox is that, historically, competition has led to its benefits accruing to one group, while its costs are borne by another. For some the lesson is that competition should be controlled or even superseded; for others that there should be compensation through redistribution for any ill effects resulting from competition; and yet for others that the forces of competition have hitherto been insufficiently strong to maximise total well-being.

COMPETITION AND INDIVIDUAL HAPPINESS

Underlying the march to happiness have been two psychological and economic premises:

(i)The aim of life is the realisation of maximum pleasure, the satisfaction of all desires and subjective needs.

(ii)The underlying driving force is competitive acquisition, which if allowed full and unrestricted play leads to harmony and peace and the successful achievement of universal happiness.

The search for unlimited pleasure is nothing new – it was indulged in by the elite of ancient Rome, with their supposed taste for orgies, by the great Renaissance princes of Italy, by the aristocracy of eighteenth-century France and England. What is new is that this search has now become the universal and underlying justification for Western industrial society.

In practice, in the West, an intermediate goal, that of amassing great wealth, has displaced the direct search for present happiness. The search for money and profit is assumed to be the object of the individual members of society and of their commercial institutions.

This search for money as the intermediary of happiness itself throws up a minor paradox. Work is seen by many as something ‘bad’, which must be undertaken in order to purchase the ‘goods’ of leisure and pleasure. The pleasure, status and security that people undeniably derive from their work is lost from sight and at best is converted into psychic income, which has the intrinsic disadvantage that it, unlike real money, cannot be used for the purchase of pleasure. Real money is, however, acquired through competitive activity at work.

Modern society still has traces of an ethical social code that governed actions in the world before economic competition. People still have ideas of a fair or ‘just’ price or wage in some echo of Thomas Aquinas. Sometimes traders talk of sharing custom between them and leaving something for the next person. Publicly owned and co-operative enterprises may put social goals of fairness and public service before ones of profit. Or we may observe work seen as a vocation, a source of purpose and personal dignity rather than simply money income. Or displays of altruism between fellow trade union members. And so on.

However, this older more organic society has been substantially replaced by an autonomous economic machine, which runs according to its own natural ‘laws’ and stands outside and superior to the society which created it.

The economic machine not only appears to work, for most of the time, but, being based on acquisitiveness and aggression can apparently be justified in terms of being in accord with nature. Charles Darwin, or more properly Herbert Spencer, suggested that struggle for survival is man’s natural condition and that through struggle we obtain mastery over nature and the elimination of the weak and the unfit.

If the economic machine and its laws are rooted back in some primeval instinct, then it is hardly surprising that from time to time it reveals a double nature, showing a face like that of Kali the Indian goddess of destruction. Thus believers continue to worship and to sacrifice to the economic machine in good times and bad.

After Darwin observers could claim that competition was not only found widely in nature, but was also an innate ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• Introduction
• 1. The Dilemmas of Competition
• 2. Classical Views of Competition
• 3. Modern Models of Competition
• 4. Competition in Business Strategy
• 5. The Rules of the Game: UK, EEC, USA, Japan
• 6. A Practical Guide to Anti-competitive Practices
• 7. Four Study Areas
• 8. Competition Theory Revisited
• 9. Policy Conclusions
• Bibliography
• Index