Is Competition Always Good?

In a comment to a post, Prabhudesai asked “Is competition always good?” The simple answer is “It depends.” It depends on the circumstances and on whether one gains or loses from competition.

Competition

Competition is a feature of the biological world. The competitive struggle for survival is ubiquitous and ineradicable. And one may argue that it is also necessary and desirable for evolution to do its magic. The competition between predator and prey improves both groups. Competition is good for the group but not for the individuals who are unable to come up on the top.

In the artifactual world of economic agents, competition is good for the economy or the industry but never good for any specific firm. This is an instance of things that are good at one level are often bad for the levels below it or above it. Another example: an industry failing is bad for the industry but good for the economy. This is analogous to the competition in the natural world where predators improve the prey herd by weeding out the weaker individuals. 

Therefore I believe that preventing competition or attempting to avoid competition is not a good thing for the overall health of the system. Which brings to mind Christopher McDougall’s lines: 

“Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn’t matter whether you’re the lion or a gazelle–when the sun comes up, you’d better be running.”

Trade

Let’s examine trade. Is it like competition between predator and prey? No, trade is different because it is not a zero-sum game. The predator/prey game is zero sum  — if the prey survives, the predator dies; if the prey dies, the predator survives. 

First of all, trade differs from the predator/prey game because it requires both parties to agree to the terms of the trade. Trade is voluntary by its nature; any transfer that is not voluntary is called theft or robbery.

Second of all, trade makes it possible for specialization and division of labor. Most importantly, through trade prices emerge in the market. Prices and therefore profit and loss guide the market process and lead to all the wonderful stuff we love.

Free Market Competition

There’s a very important distinction between market competition and competition in the natural world. In a free market — a market in which there are no barriers to entry or exit — the competition is not between buyers and sellers, producers and consumers, suppliers and demanders. The competition is among the buyers, among the sellers, etc.

Buyers compete with other buyers for the goods that are on offer. Sellers compete with other sellers. Competition is only among parties on the same side of the market. This kind of competition is very clearly good. Honda and Toyota compete for customers and therefore the customers win. 

Is competition wasteful? The market may have 20 slightly different varieties of toothpaste or some other consumer goods. Free markets work in such a way that if the consumers did not value a product, it would not be around. Evidently people want that choice and manufacturers able to meet the demand continue to do business.

The alternative to the free market which produces a whole lot of “wasteful” stuff is markets where some third party — not the producer or the consumer — decides what should be produced by whom and who should have it. That is not a recipe for success.

The free market may appear to be wasteful (in this sort of trivial sense) but it is the most effective and efficient institutional arrangement that leads to progress.

So is competition always good? The answer is No. In a second-best world, competition could be bad. Let’s go there next time.