Is Competition Always Good?

By: Diane Coyle (Project Syndicate)

Ask any economist whether competition is always a good thing, and the answer will be a resounding yes. After all, competition powers what the late William Baumol termed the “innovation machine” of the modern market economy.

Through competition, businesses spur each other to increase sales by serving customers better, whether by cutting prices, improving service, or offering innovative products. Innovation has driven the extraordinary improvements in health and quality of life over the past two centuries. And the world will need further creativity to solve pressing challenges such as providing low-carbon energy and transport or developing new vaccines and medicines to tackle the next pandemic or wave of anti-microbial resistance.

Competition is not the only driver of innovation, of course: publicly funded research and government regulation also are essential. But the contest among businesses is how brilliant ideas serving society are diffused at scale. There is ample evidence that strong competition is associated with higher productivity. Less encouragingly, studies also suggest that competition has diminished over time in the United States and other advanced economies.

Yet, among the wider public, “competition” has recently become something of a derogatory term, with some commentators claiming that it has enabled the emergence of dominant players in the digital domain and sectors ranging from food to finance. Adverse consequences include a loss of individual privacy resulting from digital surveillance and rising prices for over-processed foods.

To an economist, this criticism sounds paradoxical: If a market is dominated by a single firm or a small handful of companies, then by definition it is not competitive. So, what explains the newfound aversion to competition among some non-economists?

One likely explanation is that many people take the word “competition” to be a synonym for “business,” and regard pro-competition statements as indicating a market-oriented ideological stance. This interpretation runs through Competition Overdose, a recent book by the legal scholars Ariel Ezrachi of the University of Oxford and Maurice Stucke of the University of Tennessee. For Ezrachi and Stucke, “competition” means a race to the bottom in terms of safety or quality standards, or price gouging, in the interests of increasing corporate profits…