Competition What And When
An economy dominated by individual initiative and private enterprise, as opposed to one controlled and directed by some form of government, may be characterized broadly as a tripod, with supporting legs or pillars as follows:
And the structure will collapse if any one of these basic props is cut down, eliminated, either by a single stroke or by being rotted away. Lenin is reputed to have said that a sure way to destroy capitalism, without firing a shot, is to debauch the currency. He might equally well have pointed out that one way to establish socialism is to create a climate which discourages private capital formation, especially the crucial layer of risk or venture funds. It may also be insisted that private enterprise will topple, will be transformed into some form of statism, if the condition of effective competition in the market network is not maintained.
This statement, of course, does nothing more than suggest some fundamental features of the "free", no collectivist, economic order, but this will suffice for my limited purpose. The objective here is to discuss briefly the third leg of the stool, the factor of competition, particularly with a view to punching some holes in the curtain of confusion and misunderstanding shrouding the subject —a condition rampant among the rank and file, scarcely less in evidence in managerial and financial circles, and by no means absent from the textbooks of the professors of economics and the expressed views of other groups supposed to be well informed.Competition Defined — Catering to Customers
To begin with I’ll attempt to define market competition in a broad sense. Competition is the pressure present in the market which induces producers — all along the economic pipeline, from the initial stages to delivery of the ultimate commodity or service — to endeavor to meet the expressed needs and desires of customers, and as efficiently as possible. Put a bit more tersely: Competition is the force responsible for the urge to serve customers well.In explaining and applying this definition the first step is to note the use of the terms "pressure" and "force" and the absence of any reference to price. This omission is not intended to belittle the price making process and the importance of competition in this process. But in my view the underlying factor, the primal condition, is an active desire to attract business, a recognition of the need to cater to customers to maintain — and expand — the volume of output, whatever that may be. And there is widespread failure, notably among critics of market activities and results, to appreciate this point. The urge to serve customers well is not confined to price levels EU and movements as such, as is so often assumed. Changes in the physical characteristics of the product, modifications of delivery and post delivery services, improvement in personal qualities and behavior of producer’s staff, particularly at points of order taking and sale, variations in arrangements regarding payment by the buyer — these are all avenues of influence to customer attitude and behavior. In the retail market, for example, many persons may prefer a clean, orderly store, with pleasant and accommodating personnel, to a dingy discount loft, with an indifferent attendant, even if the physical product desired, and available at both places, is a standard make and model of an electric shaver. Some buyers may even enjoy walking on a carpet with a heavy nap, as they move about examining the available merchandise. Beyond doubt, pleasing and convenient packaging and attractive display of goods have an important impact on customers. And why not? Some people object to efforts such as those mentioned to "lure" patrons, but I don’t go along with the idea that there is anything wrong with catering to the buyer’s inherent desires and inclinations. The fact that the waitresses are carefully selected and well trained, and provide exceptionally courteous and efficient service, is one of the reasons why I usually take my away from home meals at Bill Knapp’s.
In short, in private enterprise it should be acknowledged that the customer is king.Product Description Another way of indicating the nature and importance of the tendency to cater to customers is via careful identification and classification of economic goods. A particular product, even in the case of commodities, is not merely an arrangement of molecules; it is rather an overall package of physical content and related conditions. Thus a pound of coffee on the retail market, for example, is not just a pound of coffee. The economic product involved varies with the raw materials used, the methods of treatment or manufacture, the package employed, the circumstances of delivery, and other associated conditions. To push the point a little further, a jar of coffee of a particular brand and size, selected by the housewife from a shelf in the supermarket, paid for in cash after standing in line for a varying time, and transported by the buyer to her home, is not the same economic good as a physically equivalent jar left on her doorstep at a satisfactory hour and for which payment is made after receiving the monthly statement from the grocery store.Closely defined as suggested, the array of distinctive economic goods available on the market, especially at the final consumer level, constitutes an almost endless list. This fact is widely neglected in discussions of the state of competitive pressure, especially among those calling for more government interference in the market process.
I particularly want to stress in this piece the need to recognize that effective competition is imperfect competition. Even in sophisticated discussions of the nature of competitive pressure, and its impact on the market, this point is often neglected or inadequately presented. There is no such thing as instantaneous, atomistic, "perfect" competition in any market, and we can be thankful for this.
In the first place may be noted the matter of practical details with respect to products and prices. It presumably costs more to transport a Hershey chocolate bar from Pennsylvania to California than it does to ship it to New York, but it doesn’t follow that it would be good sense to try to establish a different price in each of these market areas. There is more material in a large size pair of socks than in a small size pair of the same style and quality, but I’ve never heard of a customer complaining because all the sizes have the same selling price. In contrast the price of the package of corn flakes or other cereal will vary with the amount of the contents and the price of a carton of "large" eggs is more than that of the "medium" size. In general, it is safe to say, practices such as these are not objectionable, and do not indicate absence of adequate competitive pressure. It may also be urged that customer reaction can be relied upon to bring about prompt modification of unreasonable pricing procedures and schedules.
Much more significant is the necessity for time lags in the processes of product improvement, price adjustments, and other changes. It is a blessing, rather than something to be deplored, that making even small changes in business operating methods can’t be effected instantaneously throughout the whole structure of production and distribution. If the person or firm with a new discovery or idea, major or minor, knew that the instant the improvement was introduced on the market, or preparations to introduce it were begun, everyone else in the field, including newcomers, would immediately match such action, the incentive to change, development, advance, would largely or entirely disappear. It is the hope of getting a head start, gaining an advantage with buyers, at least temporarily, that provides the principal spur to the ingenious, the resourceful, the innovative. And, to repeat, this is a blessing, not a bane; it deserves to be encouraged, not curbed.
The condition essential to technological progress, and greater output of economic goods, is a climate that provides rewards for the go-getters, the hustlers, the sprinkling of those with new ideas about methods and an urge to promote more efficient operation and improved utilization of available resources. When there is no such climate, when interference with initiative, drive, and yearning for improvement reaches the saturation point, the march to greater production per capita, to higher living standards, will grind to a halt. One of the major weaknesses in prevailing attitudes is preoccupation with the condition of the weakling, the underdog, and increasing forgetfulness of the important role of the talented, the energetic, the inventive. Coddling the inefficient and curbing the hustlers is the sure road to a stifling of progress, and an improved economic condition for all hands, and especially those for whom there is currently such great concern.
In the above observations no specific reference has been made to rivalry among producers for customer favor. This condition is generally regarded as the very heart of competitive pressure —the primary factor that induces sellers to try to serve customers well, either through price adjustment or in some other manner. I go along with this to a degree. Beyond doubt the presence of other sellers in the market place, actively seeking customer orders, is a major ingredient in the mix of conditions impelling product modification and improvement (in the broad sense already explained), and efficient operation as a means to matching or beating the prices at which rivals are offering comparable goods.
In this connection the pressure of the potential competitor should not be overlooked. Where a producer is temporarily without active rivals, but there are no serious obstacles to the entry of others into the field, the welfare of the customer — with respect to product quality, price, and so on — may continue to be the dominating consideration.
It is perhaps somewhat objectionable to stretch the term "competition" to cover other influences than market rivalry that provide protection to customers, that encourage seller subservience to the buyer. But that there are such influences can be readily demonstrated, although there is a widespread tendency to forget this side of the coin. In other words, in a free market the urge to serve the customer well is not solely the result of pressure exerted by either active or potential rivals. This aspect of market activity may be regarded as a supplement to competition in the narrower sense, of substantial significance, and deserving more attention than it receives in discussions of price making and seller buyer relationships and behavior.
Single Producer Situation — Demand ElasticityThat the producer will be sensitive to customer needs and attitudes even in the absence of both active and potential rivals in his specific field can be made clear by postulating a situation of this type. Such a producer must still face the fact that the demand for his particular product will almost certainly be elastic. Especially nowadays, with markets loaded with a tremendous range of goods with minor variations in serviceability, the customer can reduce or discontinue his purchases of a particular product without great hardship or even inconvenience. Thus he is protected from bad treatment by the ease with which he can modify his buying practices — and the typical producer of some distinctive commodity or service is very much aware of this possibility, and acts accordingly.
Just try to think of a product at the ultimate consumer level that is so essential to the buyer’s welfare that he must have it regardless of price or attendant conditions. It is difficult to find good examples, especially if we confine attention to the output of private enterprise. Even in the case of the public utilities, so-called, such as telephone service and electric power, the customer is by no means helpless, aside from the efforts of regulatory agencies. The householder or other consumer of energy, for example, can readily shift from electricity to gas or vice versa, (to say nothing of oil and coal), for at least a portion of his needs.
Where elasticity of demand depends entirely on the possibility of substitution it is not unreasonable to say that the producer finds himself confronted by rivals for the customer’s buying power, even if rivals are not at the moment offering an identical product on the market. However, it is important to note that demand for most specific products is inherently elastic to a degree. If plane fares soar the customer may decide to do less traveling, by air or otherwise. If the price of telephone service advances sharply the householder with two or more phones may decide to curtail his expenditures for such service by having one or more instruments removed, and he also may restrict the number and duration of long-distance calls to children, grandchildren, and others. The buyer of electric illumination may also readily contract his use of this product by turning off some lights and using smaller bulbs. The plain fact is that we don’t have to consume a particular level — to say nothing of an expanding amount — of most of the array of specific goods and services making up the present-day standard of living. In the absence of actual coercion by some government agency, or a gang of thugs or racketeers, the customer still is sovereign — and without need of aid from government, or consumer advocates and other busybodies.What About Monopoly?
Those favoring increasing interference by government agencies with the activities of sellers and buyers, throughout the economy, and especially in the area of consumer goods and the retail market, will of course reject the position that the customer is usually able to protect himself from exploitation, assuming that he is not subject to intimidation or downright dictation. They allege that producers will enter into agreements and combine forces to build monopolistic market positions, and that action by government is essential to resist such developments, and break up trusts and other combinations, including huge corporations formed through mergers. They point to the long history of Federal antimonopoly legislation, and enforcement procedure through the courts and other arms of government, and assume that without these efforts an unbearable structure of monopolistic control of the market apparatus would have been achieved. In short, the position is taken that a healthy state of market competition is impossible without government intervention.
This is a big subject, and must be dealt with here very briefly. In my judgment a careful examination of the historical picture and the current state of affairs will disclose that the most deadly influence tending to destroy the effectiveness of the market, and stifle the pressures and factors that afford protection to the buyer, at all market levels, is government interference. Indeed, there is good reason for regarding government as the major culprit, the villain in the woodpile, in fostering, directly or indirectly, monopolistic conditions that have been sustained and seriously harmful.
On the current scene, many will agree, the tremendous power wielded by labor unions in the market for personal services, rests in large part on enactments of Congress and the procedures of enforcing agencies, plus failure of the police power to curb intimidation and violence, including wanton property destruction and physical injury — and even death —to individuals with the temerity to resist the labor bosses.
It may also be urged that the tide of intervention that has been flowing over our markets like lava, all in the name of protecting buyers and preserving competition, has discouraged producers from catering to customer desires and making prompt modifications and changes in technology and products in response to changing conditions. In the case of the railroad industry, certainly, now flat on its back, stupid and slow regulatory action has been an important factor in checking or preventing timely modernization of plant and equipment, prompt price adjustments, downward as well as upward, and changes in service schedules and operating methods. Then, more recently, came the crippling impact of vast expenditures on highway construction, at taxpayers’ expense, to facilitate the growth of transportation by motor vehicles.
Close scrutiny of the course of "antitrust" legislation and enforcement efforts shows that this continuing crusade to preserve and strengthen competitive pressure in the market structure has not been a success, viewed as a whole. Courts and other enforcement agencies have shown little awareness of the meaning of competition, and the related market conditions that serve to keep producers on their toes in the effort to attract customers and expand volume of output. There has been a tendency to assume that uniform prices in a given market area indicate a noncompetitive condition, despite the fact that such pricing will surely result from keen and persistent competitive pressure. That it may not be practicable to change prices every day, or even every week or month in some fields, is often overlooked. There has been little evidence of an understanding of the plain truth that rivalry among a few large producers can be as vigorous, and as conducive to customer welfare, as the competitive pressure engendered in a field where many are contending for buyer favor. There has been an appalling lack of understanding of the relation of the operating cost of a particular producer to the competitive market price of the product.
The impact of the long delays in reaching and implementing legal decisions has been harassing and stifling. And decisions in many cases have been impractical to the point of absurdity. For example, when a court orders that company X must "divest itself" of company Y five or six years after the operations and financial structures of the two concerns have been integrated, the decision is hardly short of outlandish in its neglect of economic reality and damaging consequences. Such decisions are on the same level as would be an annulment of a marriage after several children have been born to the couple.
In sum, there is reasonable ground for concluding that if government would follow a hands-off policy, stop the persistent and increasing intervention in the market processes, there would be little need to worry about monopolistic tendencies. Left alone, a free market will discipline itself, provide corrective measures in the normal reactions of buyers and sellers. The proper function of government is to prevent intimidation and violence, to protect participants in the economic process from racketeers, mobsters, and thugs, not to take control away from the producers and consumers, the buyers and sellers.
Mistaken Views of Market RivalryThe belief that unless the condition of competition is enforced by government the market structure will become monopolistic is not the only mistaken conception that is widely held. Frequently encountered is the notion that market rivalry is inherently bad, cruel, destructive. The history of the free market, it is pointed out, is littered with the wreckage of business firms — especially the "little fellows" — that have failed in the struggle for survival against their strong and ruthless rivals. This attitude is understandable; most of us have in our bones a bit of sympathy for the weak and inefficient. But calling for abatement of rivalry in the economic process is to argue against increasing output of economic goods and a higher standard of living.
Market rivalry is rugged, but it is not destructive when broadly considered. The pressure of rivalry is a major spur to efficiency, to improvement, in serving the consumer — the ultimate goal of all economic activity. True, there are likely to be losers in the competition for the customer’s favor, but there is the offsetting factor that laggards are often greatly stimulated by the performance of the front runners. Examples of this abound in business experience. The management of a particular enterprise, indeed, often has reason to be thankful for the pressure toward improvement in methods and products required to meet competition.
The view that the free market is a chaotic and noncooperative activity may also be mentioned. Actually the truly free and keenly competitive market is a model of sensitive adaptation, automatically, to the ebb and flow of the attitudes, needs, and varying circumstances of the participants. It is anything but chaotic. And its intricate maze of relationships between producers and customers presents the most remarkable example of cooperation, without coercive direction or control, to be found in human affairs.
Consumerism — Harmful ProductsEarlier in these comments I’ve stressed the importance of customer reaction on the market place as a factor in pressuring the producer, the seller, in the direction of serving the customer well, even in the extreme case of the absence of a condition of immediate or potential rivalry for the buyer’s favor. And in line with this position I’ve expressed concern over the rising tide of intervention in the consumer’s conduct, ostensibly in his behalf. This "consumerism" movement deserves some further attention, as it represents a serious threat to the maintenance of a competitive market structure, especially when it takes the form of a great expansion of governmental regulation and interference.
The very essence of a free economy, with effective markets, is the right of both buyers and sellers to make decisions, to choose courses of action. The degree to which this right is impaired, is restricted, measures the distance an economy has moved into the socialist morass. Socialism is nothing more nor less than a system under which the state makes the choices rather than the individual participants in the economic process, at both the producing and consuming levels. By the term "state" in this connection I have in mind government in all its manifestations — boards, bureaus, commissions, and so on— including cases where the ultimate power rests in a single despot, or a small coterie.
I reject outright the conception that the customer — including the ultimate consumer — is a boob, incapable of deciding what to do with his income or other available funds. True, many of us may make careless and unwise decisions at times. If, for example, a particular individual impulsively buys a silk shirt for himself when his children are badly in need of more milk the neighbors may regard this action unfavorably —and their critical attitude may be amply justified. But what is the alternative to letting the individual buyer assume responsibility? Is there good ground for expecting that a government board or other agency, with coercive power, will do better than the typical market participant? An arm of government is made up of human beings, very likely not superior in wisdom and foresight to the average member of the governed group even if good intentions and lack of political motivation are assumed. Moreover, to come to a decision having substantial merit in the particular case the coercive agency must become familiar with the specific circumstances — and this takes time.
Both historical and current experience indicate plainly that the individual participant in the economic process can generally be assumed to be more fully acquainted with his economic needs and circumstances than an outside agency can be, even after thorough investigation. Moreover, the individual can act promptly before conditions are modified, whereas there is certain to be delay in reaching and implementing a determination by a governmental body. The case for substituting government decision-making for consumer sovereignty has no solid foundation.
There remains the question of how to deal with harmful products. As we all know, producers may cater to the desire of some individuals to consume dangerous drugs, for example, and may even undertake to stimulate the volume of demand for such drugs. In this connection I think it should be admitted that there is a role for the policeman in the economic process, even where the free market is dominant. But it is a strictly limited role. If it were possible for the adult alcoholic or the drug addict to go off in a corner and destroy himself at his own gait without trespassing on the rights of dependents or anyone else, I would personally be quite willing to see him take such action. But this is far from the actual case. Take a look, for example, at the frightful carnage on the highways that careful studies show to be attributable to drinking drivers. Here is a clear need for the intervention of some coercive power, and it is rather astonishing that so little is being done about this outrage.
On the other hand, I am very skeptical of the merit of much of the interference with the market by the Food and Drug Administration. Of course nearly every natural or manufactured product is toxic to somebody in some circumstances. I’ve known several people who couldn’t tolerate strawberries but this would hardly warrant putting into effect a maze of regulations regarding the growing, marketing, and use of such berries. Rivalry among sellers and the reactions of customers are in general a better market regulator than any government agency.
Two Other Misunderstandings —Regarding LaborTo conclude these reflections I want to call attention to two other areas where lack of clear thinking is — unfortunately — widespread and damaging.
A serious misunderstanding is partly responsible for the development of monopolistic, noncompetitive conditions in the labor market. Human beings, so the story goes, should not be regarded as commodities, to be priced on the market place like sacks of potatoes. Instead, there must be established a structure of protection for workers composed of strong union organizations on the one hand (to implement collective bargaining, and with power to strike and shut down plants and entire enterprises), and government legislation and enforcement agencies on the other (to provide minimum wage laws, set safety standards, prevent collusion among employers, insure the rights of unions to call strikes and set up picket lines, and so on).
All those who don’t approve of slavery will of course go along with the view that people are not marketable commodities, but it must be insisted that personal services of all kinds that are required in the productive process are economic goods, subject to demand and supply influences.
It may also be urged that an important underlying force in preventing worker exploitation is rivalry among buyers for the service he is able to furnish. Buyers of services are no less keen in their bidding for a particular kind of service than they are in bidding for a desired physical commodity. There is much evidence that this force still operates with substantial effect in labor markets, with respect to all grades and types of personal service, despite governmental interference and the coercions represented in prevailing union tactics. In saying this I’m not forgetting the case of the community with only one manufacturing plant and the need for worker mobility.
Another major misunderstanding, widespread in industry, is the notion that workers (people furnishing personal service, from the top brass to the men on the assembly line) and the capital furnishers (those providing the funds to endow the enterprise with the necessary plant facilities and other resources) have conflicting interests, are rivals in sharing the fruits of the economic process. Actually the welfare of the employees of a business is closely linked with and dependent upon that of the owners or other investors. Viewed broadly, as has often been pointed out, wage rates tend to vary with the supply of "tools" (capital facilities of all kinds) per man; in other words wages will be high where capital is plentiful and technology advanced, and relatively low where there is plenty of labor but equipment is primitive and limited. As a general truth this can hardly be challenged.
Put somewhat differently, this means that the workers (the personal service suppliers) should favor a climate fostering saving and capital accumulation, and hence a level of earning rates for those furnishing funds that will be attractive. The individual worker is in competition, in a sense, with his fellow workers, and thus may well be in favor of a low birth rate and restricted immigration, while at the same time supporting the view that capital should command as high a return as the forces of a free, competitive market will afford. The workers and the capital furnishers are not in contention, or opposition, but are joining hands, so to speak, to make the wheels of business turn rapidly and efficiently. This does not, of course, gainsay the fact that technological development and advance may cause inconvenience and need for retraining on the part of particular groups and classes of those supplying personal services. It also does not deny that the result for investors will vary from losses to occasional exceptional rewards for particular business entities in varying circumstances and intervals of time.
In my classes I was fond of illustrating this point by imagining that the president of a small company, sitting in his office one morning, hears a timid knock on his door. The caller is one of the lowest ranking employees in the factory, and he stands hesitatingly in the doorway, twirling his cap in embarrassment. "Come in, Joe," said the president heartily, "What can I do for you?" Joe was still nervous but finally came out with it. "Sir, I saw in the paper last night that our directors have decided to cut the quarterly dividend to the stockholders, and it worried me. Are you sure, sir, that this is necessary? Are we doing all we can for our investors?" Without letting my imagination carry me further, I might note that probably the president of any company would be so startled by such an experience that he would be in danger of a heart attack. But I submit that Joe was on the right track, and behaving in a rational manner, in accordance with the basic self interest of a worker out in the company plant.
This article was originally published by the Foundation for Economic Education (FEE) in The Freeman on June 1973.
W.A. Patton is Professor Emeritus of Accounting and of Economics, University of Michigan. He is author (or coauthor) of a score of books and many articles, largely in the field of accounting. Since his retirement at Michigan, he has continued his writing and lecturing activities and has done part time teaching at a dozen colleges and universities, in ten states. The Foundation for Economic Education (FEE), one of the oldest free-market organizations in the United States, was founded in 1946 by Leonard E. Read to study and advance the freedom philosophy. FEE's mission is to offer the most consistent case for the "first principles" of freedom: the sanctity of private property, individual liberty, the rule of law, the free market, and the moral superiority of individual choice and responsibility over coercion.
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