The Evils of Competition

The principle that exposure to economics should convey is that of the spontaneous coordination which the market achieves. — James M. Buchanan

The last time I was out having lunch with my economics guru, I pondered the question that is foremost in the minds of most Indians. “What,” I asked the great guru, “explains the shoddy quality of goods and services that one finds in India generally?”

“That I can tell you in one word: competition.”

“How so?” I said. “Isn’t competition supposed to ensure lowest prices, and highest quality instead?”

“Certainly. But you have to remember that a market has two sides to it. There is the supply side. And then there is the demand side. It is the competition in the supply side that ensures high quality and low prices. But if for some reason, there are barriers to entry in the supply side of the market, then you have a problem.

“Here is how it works. Suppose you restrict the entry of firms into the market by decree such as done in the “License Permit Quota Control Raj.” Suppose this leads to low quantities supplied relative to the demand. Then on the demand side, there is competition for the limited quantity supplied. So the quality goes to hell in a hand basket and the price goes up.”

I sort of realized the problem. But I needed a ‘fer-instance.’ “For instance?” I asked.

“Competition in the demand side is what drives out quality and pushes up the price. You do recall that not too long ago, the telephone system was the sole preserve of the government. No private sector firm could enter the market. What was the result? If you wanted a phone, you had to wait for years on end, sometimes as long as eight or ten years. Given the enormous waiting lines, the public sector firms supplying telephony were assured customers who would be willing to put up with shoddy phone service because the demand far exceeded the supply even at the exorbitant prices being charged.

“In those bad old days, you had competition on the demand side. Compare that to today. The competition has shifted to the supply side of the telecommunications market. Now private firms compete with each other to provide phone service. The years of waiting time has been entirely eliminated and now you can get phone service in a matter of hours.”

“Are there any other examples?” I asked.

“Lots and lots. Whenever you see shoddy services or crappy goods, ask yourself where the competition is. You will invariably notice that the competition is on the demand side. Train service? Government monopoly and therefore poor quality. Air transportation? Used to be shoddy but now it is much better because there is at least limited competition.

“Excess supply of goods and services is rarely a problem in over-populated underdeveloped economies; it is always excess demand.”

“So what was the reason for not allowing entry into the markets? Why restrict entry on the supply side in the first place?” I said.

“Greed. If you restrict entry, you have monopoly power. That allows you to collect monopoly rents. Here is how it works. Suppose you want to collect the monopoly rents from, say, the two-wheeler market. You decree that for a firm to manufacture two-wheelers, it has to obtain a license. How much will a manufacturer of two-wheelers be willing to pay for a license to produce and sell them? Almost as much as they will make by charging a high price in a non-competitive marketplace.”

“Who gets these monopoly-like rents? I have not heard of any rule that seeks a hugh license fees from manufacturing licenses,” I said.

“Well, you don’t have to have an explicit rule. You just have discretionary powers as to who you hand them out to. For instance, as the Minister for Two-wheelers (assume there is one), you will hand it out to the firm that pays you a lot of black money and also fills up the coffers of your political party. Corruption of the political process is a handy by-product of the license quota permit control raj.”

“Damn,” I said. “That explains to things in one shot. First, why we have lousy quality high price goods and services. Next it explains why it is so hard to get rid of the license permit quota control raj. Is there a way out?”

“Yes, there is. But it won’t happen till the last politician is strangled with the entrails of the last bureaucrat.”

Seeking Causes

… Professional publicists know there is always a good living to be
made by catering to the public’s craving for optimistic reports. Such
behaviour finds no justification in the attitude of the Buddha,
expressed five centuries before Christ: “I teach only two things: the
cause of human sorrow and the way to become free of it.” The present
work, though written by a non-Buddhist, proceeds along the Buddhist
path — first to reveal the causes of human sorrow in population
matters and then to uncover promising ways to free ourselves of the

Hearing the Buddha’s statement today many people think, “How
depressing! Why accept such a pessimistic outlook on life?” But they
are wrong: it is not a pessimistic view if we reword it in terms that
are more familiar to our science-based society. Reworded: “Here is
something that isn’t working right. I want to fix it, but before I
can do that I have to know exactly why it doesn’t work right.” One
who looks for causes before seeking remedies should not be condemned
as a pessimist. In general, a great deal of looking for causes must
precede the finding of remedies.

‘Living Within Limits’ by Garrett Hardin – Prof Emeritus UCSB.

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