Monday, 17 October 2016

Competition is not always good

In general competition can yield lower costs of goods & services, better quality, more choices, more innovation, greater efficiency faster delivery etc. Competition does not exist abstractly, but is influenced by the existing legal and informal institutions. Market competition, while harming some participants, often benefits society. But competition doesn't always benefit society.

Intellectual property rights can restrict competition along some dimensions (such as the use of a trade name). Intellectual property and antitrust policies complement one another in promoting innovation and competition. Likewise, contractual non-compete clauses are justified for their pro-competitive benefits.

One economic reality is that competition and antitrust law do not permeate all social and economic activity. A company’s entry would tend to a destructive competition in markets already adequately served and would not be in the public interest. Such decisions are best left to consumers, not regulators.

Markets once considered repugnant (eg lending money for interest, life insurance for adults) are no longer. Markets that are repugnant today (eg slavery), once were not. Some areas of economic activity such as the post office, railways  etc remain in government monopoly and not open to competition.

Although competition is beneficial, not all forms of competition are beneficial. Some methods of competition are socially undesirable. Antitrust immunity is rarely a good thing, is rarely justifiable on the grounds of improving societal well being, often outlives its intended purpose.

Competition is not always beneficial. Rather than compete to build consumers’ trust in their business, firms instead compete in devising better or new ways to exploit consumers. The credit card industry provides one example. Some consumers do not understand the complex, opaque ways late fees and interest rates are calculated. For other credit card competitors, exploiting consumer biases makes more sense than incurring the costs to debias.

Today corporations and trade groups spend millions of dollars lobbying the federal and state governments. Microsoft, for example, historically did little lobbying. That changed after the United States filed its antitrust lawsuit. Microsoft now spends millions of dollars annually on lobbying. Not surprisingly, given the recent antitrust scrutiny, Google spends even more on lobbying. 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. Competition can pressure companies to engage in unethical or criminal behavior, if doing so yields the firm a relative competitive advantage.

Competition can encourage companies to: 

  • invest less in legal compliance and more likely violate the law.
  • pay kickbacks to secure business. 
  • underreport profits to avoid taxes. 
  • manipulate the ordering protocols

If competition is the problem, then monopoly is not the cure. The remedy is neither monopoly nor over regulation. But the remedy is not simply more competition, which can increase the financial system’s instability.

Competition should, and often does, improve accuracy. Competition increases the pressure on intermediaries to engage in unethical behavior. Markets where intermediaries can manipulate information and test results can enjoy greater efficiency with less competition.

The threat of losing business to a competitor and competition increases the threat of customer loss, firms are more likely to respond by matching their rivals’ behavior and crossing legal boundaries. Entrants, rather than remedy market failure, contributed to it. Market competition produces at times suboptimal results.

Competition could increase vice. Competition in a market economy, while often good, is not always good.

"I do not want India to be an economic super power. 
I want India to be a happy nation - JRD Tata"

My View:
In the absence rigorous laws and enforcement mechanisms with honest officers, liberalization has resulted in outright looting of public money by cronies. The argument that systems are gradually maturing is untenable after 25 years of start of liberalization. While benefits of liberalization and economic reforms are being enjoyed by rich, neo-rich & middle classes, poor class is left behind. 

In the absence of regulatory mechanisms, ventures mushrooms in profitable sectors and that sector becomes financially nonviable resulting in wastage of scare capital. Intense competition in some sectors is resulting in exploitation of consumers both with reduced quality of goods & services exposing consumers to risk and at times crime as well. Non compliance of law & rules and tax evasion has become rampant with connivance of obliging corrupt officials and political patronage.

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