Democrats & Liberals Archives

Does Being Competitive Increase Profit?

Pundits and economists proclaim daily that we must be more competitive. Competition will make us rich. Competition will make us strong. Competition will enable us to remain a super-power. Recently I read “The Undercover Economist,” by Tim Harford that presents the same story. However, using his text, I come to the opposite conclusion: Business, especially Big Business, makes its profits by reducing competition.

Harford talks about efficient, and thus perfect, markets:

"In a perfectly competitive market, the price of coffee would equal the marginal cost of coffee. If the price were lower, firms would go out of business until it rose. If the price were higher, new firms would enter or old firms would expand their output until it fell."

He is talking about Starbucks and other retail outlets. This statement explains why profits are low in retail. They are low because there is lots of competition. Stated another way, the more efficient or more perfect the market the less the profit you make.

Competition keeps profit down.

So how come the big corporations make big profits? Every time they make an announcement, like a new invention or a merger, they blabber on about competition. While they thoroughly confuse the public, they go about DECREASING competition as much as possible.

Why does a General Electric or an IBM or a Microsoft constantly seek new innovations? Because if they have the new gadget and nobody else does, they may charge high prices without worrying about competition. Seeking innovations is a way to reduce competition and make piles of money.

Being non-competitive, not competitive, is the way to make a big fortune.

Another way to be non-competitive, or at least less competitive, is to merge. If you are one of 5 major companies in competition with each other, combine with 1 or 2 of them to reduce the number of competitors. Again, less competition brings more profits.

The so-called efficient market does not exist, as Harford readily admits. But, he says, we must seek to get as close as possible to it. Why? How will you get Big Business to conform? They're making out like bandits and will not change for the sake of "efficiency."

Let's not get bogged down with market efficiency and other economic concepts. We, as people, are more than pawns in an economic system. Let's find a way to measure the good society.

Posted by Paul Siegel at June 1, 2006 5:28 PM
Comments
Comment #153506

You are taking too narrow a view of competition. When firms come up with new innovations or when they figure out to make things by better methods, they are being more competitive. The idea is to figure out what people want and give it to them. Others then copy, so you have to improving

BTW - Starbucks is one of the most profitable stocks you could have owned in the last ten years. They made money by taking a traditional commodity and making it something special that people wanted to buy. Nobody has to buy Starbucks coffee, but they want to.

People who think like socialist don’t understand dynamism. They are zero sum thinkers. Free market people figure out how to create wealth. I don’t think the socialist really can understand no matter how many times we show them and no matter how many times their doom and gloom predictions (more than 200 years worth) don’t work out.

Posted by: Jack at June 1, 2006 6:05 PM
Comment #153510

This is typical right wing rhetoric, all talk and no walk. If competition were so great, why do corporations need government welfare?

This follows their all talk, no walk, rhetoric pattern: smaller government while growing agencies and personnel faster than ever before; fiscal responsiblility while creating record deficits and national debt; freedom and liberty all the while taking countless steps to diminsh freedom and liberty for citizens while enhancing their own to whatever they choose in government without consequence of oversight; homeland security while absolutely turning their backs on open borders years after 9/11 and cutting funds for security in NY and DC, the two targets of 9/11 in order to spread the money to states where they need to win in November.

When Republicans talk competition, just subsitute the word competition with the words monopoly and oligopoly, for an accurate understanding of their intentions.

Posted by: David R. Remer at June 1, 2006 6:10 PM
Comment #153519

Thanks Paul,

We’ve needed someone to say this out loud. Big business is all about reducing competition. Ideally there are other players in the market to reduce this effect. But as we all know once a player becomes a certain size they begin monopolistic practices, such as exclusive contracts and non-compete clauses. They are protecting “brand”.

Creating wealth is an interesting concept. So are Ponzi schemes. Understanding the difference isn’t always so easy. The term “create” implies the act of producing something new. An invention, a technique, an idea. There are a few corporations that do this. Most don’t. The inventor of Televison died poor and almost unknown. Why? Because an entrprenuer stole his invention and used legal tricks to undermine him. Did Bill Gates invent something called Windows? No. Apple did. Who made more money from it? The myth of capitalism is filled with these stories that people ignore.

Don’t get me wrong. Marxism isn’t the answer. Free markets are fine. Monopolies are not always bad. Our phone lines and power grid exist because of monopolies. It’s just that often proponents of free markets simply don’t know what they are talking about and espouse it as some sort of panacea. Life is messy. There are no panaceas. Sometimes you just have to look at what is really happening behind all the B.S.

Posted by: gergle at June 1, 2006 6:37 PM
Comment #153522

Theoretically, and in most practical cases, competition is great for consumers, and also for business. Both political parties use the “competition” and “fair play” angles to advance their causes when convenient, but neither really wants that perfect balance. David R is right about Republicans favoring monopolies to the detriment of the consumer, but Dems use competition to forwrad the cause of the consumer, to the detriment of business.

As far as development of new technologies being anti-competition, it is exactly the opposite. “Competition” doesn’t mean everyone playing together and taking equal shares of the pie, but fighting and maneuvering for every last crumb. That is what breeds progress and growth.

Posted by: David S at June 1, 2006 6:42 PM
Comment #153549

It seems as though the threshhold where competition falls down as a methodology is where companies become large enough, or have a large enough market share to make the goal of ingesting the competition or otherwise eliminating it a feasible undertaking.
Another form of this is what we are seeing with the few big oil companies who are looking at their “competition” raise prices not as a chance to get more business by charging less, but as an indication of what they can all get away with charging for a needed commodity. Each examination fails to find collusion, because they no longer actually need to talk to each other to all raise prices and profits.
dana

Posted by: dana at June 1, 2006 7:56 PM
Comment #153576

“…but Dems use competition to forward the cause of the consumer, to the detriment of business.”

Since when? If, for instance, the Bankruptcy Act of 2005 is any indication of the Dems’ concern for the consumer, (a law that doesn’t even protect the consumer from identity theft), then I can do without their ‘concern.’ Nineteen Democratic senators and 73 Democratic Reps voted for that Credit Card Industry-written piece of crap. Its that kind of duplicity, claiming to care for the working man and the middle classes,then voting with the finance industry,
that made it easy for me to leave the party. That’s an industry, by the way, that cleared over $30 billion in 2004.

The Democratic kow-towing to big business through trade agreements like NAFTA has done nothing but screw the American worker as well. There’s a reason why Big Business Repubs liked Clinton. The man described himself as an Eisenhower Republican. With that kind of duplicity, the Democrats can lose the next election, and the one after that, for all the help they give to the poor and the working class.

Posted by: Tim Crow at June 1, 2006 9:53 PM
Comment #153593

Paul:

Why does a General Electric or an IBM or a Microsoft constantly seek new innovations? Because if they have the new gadget and nobody else does, they may charge high prices without worrying about competition. Seeking innovations is a way to reduce competition and make piles of money.

With this logic, the Soviet Union should have been the way to go.

Your logic is exactly wrong. These companies make “new gadgets” because of competition. If they do not, someone else will, and they will be another casualty of capitalism.

You have the cause and the effect in the wrong place Paul. You have the innovation as the cause, and non competition as the effect. The truth is that COMPETITION is the cause, and INNOVATION is the effect. Not too many patents coming out of Cuba and North Korea lately.

Craig

Posted by: Craig Holmes at June 1, 2006 11:22 PM
Comment #153651

Paul,

“So how come the big corporations make big profits?”

Big Biz makes Big Profit because they are…big. It makes no sense for a business that does billions of dollars of revenue to make a few thousand dollars in profit. You must consider the scale of the organization.

“Every time they make an announcement, like a new invention or a merger, they blabber on about competition. While they thoroughly confuse the public, they go about DECREASING competition as much as possible.”

Most businesses strive for growth. How do they do that? Innovate and introduce new products to the marketplace (Craig Holmes said it best a few posts above), or merge/buy another company.

“If you are one of 5 major companies in competition with each other, combine with 1 or 2 of them to reduce the number of competitors. Again, less competition brings more profits.”

Take insurance (where i work). There is not much you can do to organically grow in this business…it is in the very mature stages of the market cycle and organic growth is very difficult to do without compromising your underwriting. If shareholders demand growth, you either buy a similar competitor or get into a new line of business. You must consider the position of the industry in the market cycle (growth vs. mature).

“Let’s not get bogged down with market efficiency and other economic concepts.”

In my view, taking basic academic business school concepts that are universally and trying to throw a political spin on them completely misses the point. You HAVE TO consider “other economic” concepts to get a complete picture. To do otherwise is cherry picking a limited number of facts and ignoring everything else. Business and markets are not that simple.

Posted by: Greg at June 2, 2006 8:50 AM
Comment #153659

whoops, the 1st sentence of the last paragraph should read “…concepts that are universally accepted and…” Sorry about that.

Posted by: Greg at June 2, 2006 9:54 AM
Comment #153663

But wait,what about the invisible hand that comes along and makes everything all right?
This problem of non-competitive competion has been going on for a long time. Teddy Roosevelt dealt with it in the 20th cent.
Companies that are in collusion or attempt to create a monopoly based only on profit margin,must be dealt with severly.

Posted by: jblym at June 2, 2006 10:11 AM
Comment #153675

Excellent article, Paul.

David Remer’s, gergle’s and dana’s posts add up to the perfect reply, because you all raised important points to counter the kind of things we always hear from Republican folks like Jack.

Tim Crow,
You raised some important points too about what’s wrong with the Democrats these days. Like you, I consider things like Nafta and Cafta an outrageous sell-out. And the bankruptcy bill was a glaringly obvious case where Democratic politicians wanted to protect their campaign donations more than they did We the People. It angered and disgusted me more than I can begin to tell you
You said:
“Nineteen Democratic senators and 73 Democratic Reps voted for that Credit Card Industry-written piece of crap.”

Yes, and these incumbents need to be voted out by Democrats. We don’t need these kind of folks representing the party. If we wanted that we’d have voted Republican.

“With that kind of duplicity, the Democrats can lose the next election, and the one after that, for all the help they give to the poor and the working class.”

You’ve jumped ship.
I did too, but then I decided that the Republican Lites are the ones who really need to go. Since I made that decision, I can’t tell you how many Dems I’ve spoken with who tell me they feel exactly the same way. And so, in a grassroots way all of us are going to try to encourage our fellow party members to vote these DLC Dems out, until our party begins to resemble it’s base again.
This might seem hopeless to you, but to me, there really seems no other way. There simply has to be a major party working on behalf of the middle class and the poor in America!

Posted by: Adrienne at June 2, 2006 10:57 AM
Comment #153722

pAUL LETS FIND A WAY?wELL LETS FIND A WAY to stop all wars,lets find a way to wipe out poverty,lets find a way to lower gas prices,lets find a way to controll mother nature it sure does sound good but any one can come up with a plan of lets find a way!The democrats have been saying lets find a way for 50 years.The president on the other hand at least is showing what the opposite of lets find a way.There are those that do and there are those that say lets find a way 50 more years of lets find a way i doubt it.Not even the american people are that stupid!

Posted by: lookingout at June 2, 2006 12:36 PM
Comment #153751

Craig:

“Your logic is exactly wrong. These companies make “new gadgets” because of competition. If they do not, someone else will, and they will be another casualty of capitalism.”

I agree with you in this sense: “These companies make ‘new gadgets’ because of competition.” Change “because of” to “to avoid.”

I did not say that innovation is bad. I merely said that innovation is a way to avoid competition.

Posted by: Paul Siegel at June 2, 2006 2:12 PM
Comment #153851

Adrienne:

“There simply has to be a major party working on behalf of the middle class and the poor in America! “

I think it’s going to be a long, slow slog for the Democratic Party. The only way I see major change happening is to begin, as you say, with the grass roots, on the local, county and state levels, slowly and pain-stakingly building a progressive coalition that will be strong enough to take on the Washington consultants and the DLC-types. I think we’re talking a generation at least.

The one thing that could accelerate the change, in my opinion, is a major economic downturn, one where the middle class, whose been clinging to the Horatio Alger, American dream for eveyone hype begin to see that they are dead-center in the crosshairs of the corporate, theocratic neocons who will stop at nothing to hold complete economic, political and cultural power.

Peak oil could very well precipitate that economic downturn. And there is going to be a hell of alot of pissed off Americans, who played by the rules for alot of years, and in the end, have nothing but grief to show for it.

Now, having said that, life has a way of giving us delightful surprises, as well. I think there will be a silver lining in peak oil—more dependency on local economy, a strengthening of community involvment and civic innovation in solving the problems we face. And the power of Washington and the federal government, will of necessity, shrink in importance. The Walmarts, the fastfood joints, the box stores will die, and local commerce, the mom & pop stores and local business people will thrive.

I think there’s some real possibilities for creative change coming down the pike—assuming we don’t kill everybody to preserve our “non-negotiable” way of life.

Posted by: Tim Crow at June 2, 2006 6:21 PM
Comment #154287

Paul,

Another excellent article. The only thing that I would add is that big business loves competition. They use globalization - which should be a good thing - in order to force the working class to compete globally there by driving wages down. Clearly they try to freeze competition against themselves out in order to produce scarcity and increase profit. They are in business to make money. You can’t blame them for trying to make money. That is what they do. That is why we need unions and government to be on our side and fight for our interest. We do not have that. The sell out of Democrats on the bankruptcy bill is a perfect example of that.

Posted by: Ray Guest at June 4, 2006 3:14 PM
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