Even though competition is the goal of various competition policies, defining competition is notoriously difficult. Competition refers to behavior (”A is competing with B”), to results of the behavior (”Prices are competitive”), and to the structural preconditions for competitive behavior and competitive results (”The market structure is competitive.”). Not surprisingly, there is disagreement about the significance of each of these points of view, and, more fundamentally, about the causal relationship between market structure, firm conduct, and market performance.

In light of these difficulties, it may be helpful to sidestep the task of defining competition and to ask what the ends are that competition is meant to promote. Over time, three recurring goals have emerged, which, not surprisingly, are the basic societal values freedom, welfare, and justice. (For a detailed discussion, I recommend Klaus Herdzina’s excellent book “Wettbewerbspolitik“.)

How does competition promote freedom?

To begin with, there are two important variants of freedom, negative freedom and positive freedom. Negative freedom is defined by the absence of arbitrary interference by others. Positive freedom is defined by autonomy, by my ability to act according to my own free will. Economic freedom, as an amalgam of both negative and positive elements, includes my ability to consume goods and services of my choosing, to acquire, arrange, and employ factors of production (land, labor, capital), and to market goods and services of my choosing to others. Freedom can further be analyzed in terms of formal and substantive freedom. Formal freedom is most significantly embodied in the rule of law, everyone is equal in his or her legal standing to enter into contracts, acquire property, seek and accept employment, etc. Formal freedom, however, does not guarantee substantive freedom. I might have the legal ability to rent an apartment, but if I lack the funds to do so, I am not free to realize that formal freedom. There has been much debate of whether substantive freedom should be part of the definition of freedom at all. At this point, it suffices to say that notions of substantive freedom spill over into the realm of justice as another end of competition, and that a state in which a significant number of economic subjects lacks the means to participate in any meaningful exchange and, consequently, has very little substantive freedom, would be deficient from a freedom-theoretical point of view. Formal freedom, thus, is a necessary but not a sufficient condition of freedom; and the same can be said for substantive freedom, even though the latter comes without the strict requirements of universalization that the former entails. In addition, economic freedom, with its various positive, negative, formal, and substantive aspects is always relative freedom, mainly because some uses of freedom are not complementary to the exercise of the same freedoms by others. My owning Blackacre means that you can’t own it. Your patent means that I can’t build the same mousetrap. Relative freedom therefore always means freedom limited by the same freedoms of others. An economic system based on (i) decentralized planning; (ii) coordination of individual plans through markets; and (iii) private property is more likely to promote the complex, multi-faceted notion of economic freedom with its positive, negative, formal, substantive, and relative aspects, than a system in which planning is centralized, and/or markets are replaced by command, and/or property rights are either non-existent or are assigned by a third-party actor, usually the government. The freedom-promoting aspect of competition therefore suggests a critical stance towards centralized planning by governments and by private actors, for example monopolists and cartels. Autonomy requires a certain degree of decentralization, and competition is a highly effective means of maintaining a decentralized market structure, where every firm struggles to expand its freedom of action by increasing its market power, only to be frustrated in fully achieving that goal by other firms trying to do the same. Thus, some degree of competition, as an activity (conduct) and as a market structure (decentralized planning), is critical to the promotion of freedom.

How does competition promote welfare?

This is the most commonly discussed benefit of competition and the conceptual link to price theory. Welfare is a function of how well (or how badly) we deal with scarcity. To increase welfare a society can (i) increase the volume of goods and services (economic growth, productive efficiency, dynamic efficiency); (ii) optimize the allocation of resources, that is, use existing resources to produce more of those goods that consumers want the most (allocative efficiency); and (iii) redistribute wealth from those who value it less to those who value it more. Free market competition helps to solve the problems inherent in (i) and (ii), specifically the information problem (prices as indicators of relative scarcity), the motivation problem (profit), and the production problem (successful ventures attract factors of production). Competition is therefore the conditio sine qua non for the promotion of welfare in a market economy. As a consequence, restraints on competition such as price regulation, cartels, and any kind of non-performance based profits, are anticompetitive and therefore detrimental to welfare. Note that welfare gains from redistribution (iii) are not quite as closely tied to competition as are economic growth and productive, allocative, and dynamic efficiencies. Some argue that competition is also the most effective means of ensuring that goods will travel to their most highly valued use. But that position, sometimes referred to as market fundamentalism, is not uncontested. For example, assuming a declining marginal value of money, $1,000 taken from a rich person and given to a poor person, may well result in a net utility increase and thus make society better off as whole. (As I said, this is a hotly contested position.) Here is the link of the welfare goal to the goal of justice; and in extreme cases of poverty to the goal of (substantive) freedom.

How does competition promote justice?

There are, of course, countless theories of justice, but their common core is a small set of distributive principles, that is, criteria to answer the question: Who deserves what? The three most prevalent criteria are: (i) merit; (ii) need; and (iii) equality. Competition promotes the merit principle, and by promoting the merit principle, also addresses need as a criterion of justice. How so? Most competition is competition for cooperation, that is, competition for mutually beneficial agreements between a seller and a buyer. The most competitive economic actor supplies more of the goods that others need the most. As a result, that actor receives the highest profits (merit), and by supplying what others need the most also contributes to alleviating the most dire needs. Competition thus promotes both, the merit principle directly and the need principle indirectly. Of course, the connection between competition and merit is much more immediate than that between competition and need. It is by no means certain that providing more inexpensive housing, a dire need for many, results in higher profits than providing luxury goods, which satisfy a less existential but much more vocal need, assuming that money does, in fact, talk. In many ways, competition will only be an acceptable practice for those who subscribe to a theory of justice in which merit plays an important role. It is another defining trait of market fundamentalists that they subscribe to merit based theories of justice to the exclusion of need and equality. Within the framework of a theory of justice that includes merit as a criterion, non-merit based profits are unjust. Consequently, anticompetitive behavior (e.g., cartels or exclusionary conduct) is not only welfare-reducing but also unjust.

Share on Facebook

Comment feed: RSS 2.0. You can leave a response, or trackback from your own site.