Tuesday, 6 July 2010

Inefficient Competition

Free market advocates would have you believe that competition leads to an efficient market and therefore cheap and reliable goods and services. This is a persuasive argument. If only the fittest survive then only the best products will be produced. In a simple economic model this may be true but in our advanced western capitalist society this idea has number of problems.

There are a number of areas in the market where it is difficult to achieve competition at all. For certain things, a monopoly is most efficient. For example, Ebay commands a 95% share of the online auction market. Is this because they innovate and provide a service 95% better than other auction sites? Not really. It dominates due to the fact that if you want to buy or sell something you go to the biggest market place to do it. There can only be one largest. It’s this gravity that once achieved is impossible to compete with. All Ebay has to do is make sure its charges are not excessive enough to allow a competitor to rise up. Even if a competitor offered a similar service for free it would be difficult to imagine how it would gain ground.

Facebook and YouTube are other examples that rose to prominence by innovation and then attained the critical mass necessary to dominate. Admittedly, these do have increased competitive influences from other areas. Twitter, whilst not challenging Facebook’s whole model provides a service similar a small aspect of its service.

Where there is no choice there can be no competition. There can only be one rail network, one power grid and one telecommunications system within a state which makes true competition impossible. What about mobile networks I hear you cry? They run their own independent networks and have competition. Yes they do which means we have three mobile masts to cover the same area one could. Is that an efficient use of resources? When was the last time you picked your train by the company that runs it or the hospital you visit when knocked unconscious?

The idea of competition also assumes a level playing field in knowledge. You can only pick the products and services you know about or understand. The appearance that a product is the best is more important to the manufacturer than it actually being the best. This means that marketing becomes the central component in manufacturing. This in itself is wasteful. If an average marketing budget is 10% of the cost of the product and you earn the average of £25k a year you will be spending £1917.42 to be told what to buy (after tax). This means you would work the equivalent of a month’s pay to go home to watch adverts on TV, in the cinema and here on the internet. I don’t find working for a month to watch adverts a very efficient use of my time. To avoid this corporate tax you could try not spending any money at all.

If the government created a department which slapped a 10% tax on all goods whilst providing confusing information about the value of goods and services there would be an outcry. Monopolies have to exist and the inability to accurately assess the inherent value of a product leads to an inefficient model of production.

The components in the iPhone 4 cost $188. It sells for $599. I don't understand how this is efficient. Apple must be paying all those Foxconn workers a mint.


Dan @ Eyes on Power said...

Very compelling - but I think it's important to add that competition and ‘choice’ is often arbitrarily enforced. There may physically be only one line of railway, one power grid or one telecommunications system – but there are different providers. If you change your gas provider, the only thing that changes is the price and the name at the top of the bill. The pipes and the gas remain the same. And, after all, it’s the gas that you’re paying for – not the fancy letterhead.

Pete @ Eyes on Power said...

That's a key point. All you really change is who bills you. All the provider can do to provide a cheaper service is to be the most efficient at billing. Of course another area is to profit by not updating prices so that people remain on more costly tariffs or to confuse consumers on costs.

Dan @ Eyes on Power said...

True and another way to profit is to reduce the cost of delivery - reducing the terms and conditions of employees, employing fewer engineers, outsourcing call centers to India etc

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