Friday 15 January 2016

Competition is Good; A Biblical/Economic Perspective



Most people will readily agree that monopolies are bad—unless you’re winning in a game of Monopoly.  Consequently, it is also generally agreed that the government must “do something” to counter abuse of power by monopolists. It is, however, not generally recognized that often, monopoly power in the market place is sanctioned—or even exercised—by governments. In this post, I had intended to draw attention to some of these government-permitted monopolies—e.g. milk marketing boards, taxis, labour unions, the Beer Store and LCBO.  I realized, however, that some general discussion of the importance of completion is first in order. As I started on that, I soon found that my post was too long. Consequently, in this post, I will focus on the general and will get back to government permitted monopolies, D.V., in a future post.

In the current post, I first review competition from a Christian perspective.  Then, I set out the advantages of competition and the negative aspects of monopoly power. A proper perspective on competition is essential to understanding the Conditional Preference for the Free Market that I have been advocating in this blog. Insufficient competition in the market is one of the reasons why our Preference should be Conditional.

Competition and the Christian


 Is competition--the underlying motivational force of a free enterpr­ise system--not something inherently immoral? Should Christians not, instead, seek to reduce competition as much as possible? Ought we, as Christians, perhaps reconsider the conventional economic wisdom that competition in the marketplace should be encouraged? Some, for example, would argue that:

Competition produces aggression, rivalry, conflict, cheating and discrimination which are anathema to the Christian conscience. For the Christian, the ideal is not competition but cooperation, which by comparison produces mutual benefits, modesty and harmony.[1]

Competition is not limited to the economy. It exists whenever the scarcity of something people prize or value results in more people wanting it than can have it. Players in games and contests compete--sometimes merely for the sake of winning, sometimes also for the promised prizes. Students may compete for grades. Suitors compete for the attention of loved ones. Christian politicians compete for the opportunity to represent the citizens. Potential employees compete for vacancies through job interviews.

Competition can be a positive influence--motivating individuals to strive for higher levels of excellence--but it can also "lead individuals and organizations to act in ways that are dishonourable or dishonest." Nash argues, however, that “these problems are simply another manifestation of original sin. They do not demonstrate that there is anything wrong with competition itself.”[2] Griffiths has rightly recognized that competition is not a Christian virtue to which we should aspire as an end in itself. The frequently used biblical image of the Church as one body, for example, contradicts that. On the other hand, the Bible also uses the image of competition positively: e.g. "Run in such a way to get the prize. Everyone who competes in the games goes into strict training." [3] In itself then, competition is not wrong; the question is how one "competes".

There is merit, therefore, in Tiemstra's characterization of competition as a "mixed blessing":

Competition prods people to do their best, but so does an attitude of conscientious service to God and neighbour. Competition promotes instability, arouses jealousy, and can provide incentives for immoral behaviour. People instinctively avoid competition not just in an effort to increase their own economic and political power, but also to promote stability and cooperation.[4]

Sadly, however, we must recognize that we are concerned with a sinful world in which the majority of people are not driven by an attitude of service to God and neighbour. Thus, without competition, most people are likely to seek their own power rather than to “promote stability and cooperation”.

In dealing with competition in the marketplace, an understanding of how economists use the term is critical. When economists expound the benefits of competition, they have in mind the "perfectly competitive market" mentioned above in which very similar products ("undifferentiated", "homogeneous") such as wheat, coffee beans and copper are traded by many buyers and sellers so that no individual buyer or seller can in any way affect the market price. Moreover, there are no barriers to entry—new buyers and sellers can easily enter the market.  In such a market, individuals can only accept the market price and decide whether they wish to buy or sell at that price. The market price depends on the overall demand and supply for the product as derived from the many buyers and sellers.

On the other hand, when non-economists think of competition, they usually think of such things as "cut-throat competition" where an individual company can, for example, offer a product at a lower price than its competitors and, by doing so, take a significant increased portion of the market--unless their competitors immediately follow suit. The economist, however, refers to this situation as one of "imperfect" or lack of competition–a situation of market failure. There are only a few buyers and/or sellers; in the extreme, you have a monopoly--only one seller (or buyer). Griffin has usefully characterized this situation as rivalry.[5]

The negative aspects that Christians abhor about "competition" in the marketplace are, in reality, the effect of rivalry or the lack of a perfectly competitive market.  The exploitation of workers and small businesses that is ascribed to “cut-throat” competition is, in fact, the result of monopolistic situations. Before discussing these negative aspects, I will first reiterate the importance of "good" competition.

Importance of Competition[6]


In a perfectly competitive market (with many buyers and sellers, freedom of entry and low entry costs), competition is a driving force for good. Goods are produced, and consumers can buy them, at the lowest possible price because of competition. Competition among producers for scarce resources ensures that these go to the most efficient firms. Competition among buyers will ensure that the goods most in demand are produced. Competition motivates firms to innovate with new products. Competition motivates businesses to continually look for better and cheaper ways to make these goods. In short, competition is the essential element that causes the market to provide the benefits that it does. In a perfectly competitive market with undifferentiated products, severe, "cutthroat" competition cannot occur. Sellers who reduce their price temporarily in order to try to put others out of business, will only ensure that they themselves will undergo that fate.

Unfortunately, in reality, there are very few perfectly competitive markets. Rather, various degrees of imperfection occur. Products tend to be somewhat different--or appear to be different--which leads to competition on the basis of things other than price--e.g. quality, service, advertising. The number of buyers or sellers may be less than "many"--a few large companies or even only one, i.e. a monopoly. Various "barriers to entry" make certain industries less competitive than others. That the investment required, for example, to start an automobile or steel maker is significantly more than for a restaurant, no doubt, explains the relative abundance of the latter.

 As Tiemstra notes, "many capitalist economies suffer from excessive concentration of wealth and the existence of excessively large, bureaucratized private businesses." [7]  Or as Vickers has written, “the invisible hand of...classical economics has been replaced by the very visible hand of concentrated economic power” ...in industrial complexes, in collectivized suppliers of labour and the concentrated power of governments and their market interventions[8].

Negative aspects of monopoly power


Certainly, there are likely to be significant costs attached to a lack of competition; monopolies that are not subject to the pressures of competitive markets fall prey to some of the same incentives to bad stewardship entailed in government operations[9]. Although the extent of the costs depend on the specific situation and are subject to dispute even among economists, insufficient competition may entail the following problems:

Higher Prices, Lower Wages, Lower Quality- If there is insufficient competition in a market, it will generally be possible for a company to obtain higher prices and/or provide lower quality or less service than in a competitive situation.  In a monopoly, the producer gains higher profits; the consumer loses. In an extreme situa­tion, for necessary goods, that can well be viewed as extortion. Historically, such situations have occurred, for instance, when poor employees were required to purchase all their basic needs at high prices in company stores. In any monopoli­stic situation, it is possible for the strong to unjustly take advantage of the weak. The higher prices, particularly when they involve necessities, may cause significant injury to the poorest in society. Stapleford, for instance, notes that

Throughout the world, especially the Third World, concentration of wealth often leads to exploitation by powerful people. Under such disparities in power, generally consumers pay higher than efficient prices, have access to fewer goods and services, and have less access to productive resources such as land. Suppliers of abundant resources, such as labor usually receive compensation below what would prevail in competitive markets. Rather than being independent agents who enter transactions voluntarily, suppliers of resources (especially labor) are trapped in conditions of desperate servitude by the dominant parties. This injustice is unacceptable to God and to his people. [10]

Monopoly price impacts are, however, not limited to Third World countries. For example,  as I”ll get back to in future, “supply management”, the monopolistic quota system in place in Canada for milk significantly raises the consumer price of a basic necessity. Those with lower income, no doubt, are hurt proportionately more by this over-pricing—as was recently illustrated by the outrageous increase in the price of certain drugs.

An interesting historical example of monopoly pricing is that of Robert Fulford, the inventor of the steamboat, who was given a monopoly on all steamboat traffic in New York for 30 years.  After this monopoly was struck down in court in 1824, a competing group involving Cornelius Vanderbilt (of “Robber Baron” fame), forced the price of a trip from New York City to Albany from seven down to three dollars! [11]

Less Output- The most profitable level of production for a monopolist is likely to be less than it would have been in a perfectly competitive market. That is, it pays a monopolist to restrict production and get a higher price for that output. That obviously means fewer jobs. From a purely economic perspective, monopolists cause misalloca­tion of resources. Moreover, as Stapleford notes above, consumers have access to fewer goods and services. In Biblical times, the monopolist was able “hoard grain” in time of scarcity and earned the curses of the people.[12]

Undesirable Combination of Outputs-Monopolists can force their customers to buy goods in combinations that they really do not want. For example, at the moment, in Canada, monopoly cable television operators require users to subscribe to “packages” of channels. For an initial price, you get a basic package with a minimum number of channels of which you might be interested in only a few. To get a certain specific additional channel, not included in base package, you have to subscribe to another package at increased cost and more unwanted channels. With modern technology it is possible to subscribe only to the specific channels that you want–as is done in France.  In Canada, however, the monopolist cable companies have, up to now, made us pay for the channels that we do not want in order to get those we do want[13].

 Inefficiencies- With less competition, there is less incentive for a company to produce efficiently and to search for better production techniques. Lack of sufficient competition thus leads to wasteful, unstewardly, production. In the final analysis, a pure monopolist that is permitted to pass on its costs to the consumer has no incentive to improve its operations. Without the pres­sure of existing or potential competition, companies may also be less quick to spend money on research and adapt to new technology.

Inefficiencies due to lack of competition are especially likely to prevail in markets that are not open to international trade. When foreign competitors are allowed in, significant restructuring may be required. Nevertheless, the beneficial impact of the more competitive situation outweighs the short-term costs; it is, in fact, one of the major driving forces behind the recent impetus to freer trade. 

Anti-Competitive Action- Given the benefits to be attained by individual companies from less competi­tion, companies frequently strive to get rid of competitors. In an oligopolistic market (few sellers), rivals may be eliminated and the entry of new competitors blocked by aggressive, cutthroat tactics. Possibilities include simple product disparagement, predatory pricing (cutting prices below cost temporarily in order to force out smaller competitors), pressure on suppliers to prevent rivals from obtaining necessary raw materials, pressure on banks to withhold necessary financing and pressure on retailers to refuse to stock the rival's product. In addition, if there are only a few competitors, they may “collude" by agreeing on high prices and dividing the market between themselves--to the detriment of the consumer and potential competitors. Finally, competition can be reduced by merging with or taking over a com­petitor.

After ridding themselves of some rivals, the remaining companies are left free to operate wastefully and to exploit the consumers. Even worse, many of the actions above would, in themselves, be unethical--evidencing the very opposite of Christian neighbour love.  However, given the sinfulness of mankind such striving is likely to occur frequently when there are a limited number of sellers. Even Adam Smith already commented that “People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”.[14]

Concentration of Power/Corruption


A lack of competition, with a few large companies, yields a concentration of power in the hands of a wealthy few. The companies or individuals in charge will not only be able to exercise the negative monopoly powers described above, they may also be able to influence governments to do their bidding. With the threat of job and tax losses, few politicians will be able to oppose them. In addition to normal lobbying, they will be in the position to bribe both politicians and relevant bureaucrats.

Webb, for example, wrote that the “increasing concentration of power” allowed the “merger movement”  which led to the loss of jobs in the early 1980s. This concern is “supported by the biblical account of the Jubilee Year as well as passages from Isaiah and Micah where, ‘this principle of avoiding the concentration of power is perhaps best expressed in a way meaningful to us today’”[15]. Moreover, as Shleifer and Vishny argue, a government rife with corruption may “maintain monopolies, to prevent entry, and to discourage innovation by outsiders if expanding the ranks of the elite can expose existing corruption practices”. Such corruption may be merely the result of government financing activities; the approved way of getting funds for Tudor monarchs in the U.K. was to sell monopoly rights! In any case, “economic and political competition can reduce the level of corruption and its adverse consequences”.[16]

Some Caveats


It is only fair to recognize that there are some situations where competition is not the most stewardly alternative. In cases such as “natural monopolies”, e.g. an electric utility, it is obviously wasteful, i.e. unstewardly, for various companies to duplicate the necessary transmission lines. If only one company is authorized to operate, however, it is (without regulation) free to set prices at whatever level it chooses. Particularly, where such monopolies provide necessities, such as electricity , the poor consumer is, likely, to be exploited. Since, moreover, these utilities tend to use public resources (e.g. road allowance), government retains significant responsibility for their actions.

Moreover, if there are fewer companies competing in a market, it is easier for these companies to attain "economies of scale." That is, as companies become larger, their costs per item produced tends to go down. The larger companies are able to use more specialized plants and equipment and allow their employees to become more proficient in narrower tasks. In some industries, e.g. the automobile industry, reasonably efficient production is possible only if there are a small number of producers. If the lower costs obtained in this way are actually passed on to the buyer, we all benefit.

Finally, it is likely that--at least in some industries--imperfectly competitive markets are, in the long run, more innovative than a perfectly competitive one. Firms must be relatively large to be able to undertake the necessary research and have some prospect of being able to benefit from that research if it is successful. In a perfectly competitive market where everyone could quickly start production of the new products, there would be little incentive to innovate. The drive to innovate is, however, the opportunity to make “monopoly” profits which will reward the research effort. Patents on new inventions are thus a necessary protection to ensure that companies are willing to undertake expensive and time-consuming research e.g. in the pharmaceutical industry. The flip side is, of course, that unless others can eventually come up with a similar product without infringing the patent, the patent holder has a monopoly with all the possible negative implications mentioned before . [17]


The Government's Task


Given the negative effects of imperfect, rivalrous competition, it is obvious, that a government which seeks to maintain justice and protect the weak has a task. The stewardly use of God's creation implies that the government promote adequate competition and regulate those monopolies and near monopolies that cannot be avoided (natural monopolies or those that otherwise benefit society through economies of scale). Most countries, in fact, already have legislation to this end--although their adequacy and implementation processes remain a matter of debate. Such legislation normally seeks to prevent the strong from driving out the weak by making such things as "predatory pricing" illegal. It also attempts to ensure that adequate competition exists so that monopolists cannot take unfair advantage of their customers. Mergers and acquisitions are, therefore, monitored (and forbidden if necessary) to prevent the merged firm from obtaining too large a share of the market. Finally, it seeks to prevent collusion by companies to artificially reduce competition and maintain high prices (and inefficient operations).[18]

Seeking to increase competition is, where possible, far preferred over regulation[19].  Almost invariably, a regulating agency permits prices to increase to levels that permit companies to recoup their costs and earn a “fair return” on their capital. Although that sounds fair, the problem is that--with all costs eventually “passed through”-- there is no penalty for inefficient operation and no incentive to resist exorbitant wage demands. Regulation also blunts entrepre- neurial incentives to innovate and take risks. In general, encouraging the entrance of competitors is, then, an attractive way to reduce monopoly power wherever possible. Moreover, not all parts of a “natural monopoly” need to be monopolies. Recent history has shown, for example,  that electricity monopolies can be broken up with the transmission of power remaining a regulated monopolist but the actual power generation broken up into competitive elements with the transmitter being able to purchase from multiple competitive generators.

I note, however, that the benefits of a free market do not require a perfectly competitive market. Even imperfect competition with somewhat differentiated products and a reasonable number of competitors should generate the benefits we have discussed. There is, however, no consensus as to the extent of concentration that is too much.  Whether government intervention is necessary to ensure competition will continue to be a matter of political debate in specific circumstances.


Concusion

Overall, I conclude, with Chewning, that “competition has an overall salutary effect on fostering business conduct that provides the best economic outcomes for the most people in a fallen world.”[20] Consequently, we must be careful that, in considering solutions to the economic ills of the day, we do not unnecessarily reduce competitive forces. In addition, we should generally be supportive of government actions which seek to maintain and increase competition.  Moreover, as I hope to discuss in the future, governments themselves must not establish or protect monopolistic industries.



     



[1].As summarized by Brian Griffiths, in, The Creation of Wealth, Hodder & Stoughton, London, 1984, p.70.
[2]. Ronald Nash, Poverty and Wealth: The Christian Debate over Capitalism, Crossway Books, Westchester, 1986.pp.73ff.
[3]. 1 Cor 9:24-27. See also Heb 12:1; Ps 19:5. Haymond notes that the “excellent wife” depicted in Proverbs 31, “will be a fierce competitor in all her commercial activities”..”competing fiercely to serve others and benefit her family and community”. Jeffrey E. Hammond, “The Proverbs 31 Women: Entrepreneurial Epitome?”,Faith and Economics, Fall 2012, p.4.
[4]. In Institute for Reformational Studies, Window on Business Ethics, Potchefstroom University for Christian Higher Education, 1993, p. 145,
[5]. Op. cit., p.72.
[6] I stress that I am talking about competition in the macro sense--is it good to have a competitive markets? For a discussion as to how Christians in business should act in a market that is not “perfectly competitive”, see Clive Beed, “Jesus and Competition”, Faith & Economics, Spring 2005, pp.41-57.
[7]. Tiemstra, op. cit., p.231.
[8]. Douglas  Vickers, Economics and Ethics. Praeger Publishers, Westport, CT,1997, p.79.
[9]. John Boersema, Blog, Government does not work!

[10].  John E. Stapleford,Bulls, Bears & Golden Calves: Applying Chrisitan Ethics in Economics, InterVarsity Press, Downers Grove, Illinois, 2002,p.64.
[11] Burton W. Folsom, Jr. The Myth of the Robber Barons, Young American Foundation, Herdon, Virginia, 2003, pp.2,3
[12]. Proverbs 11:26
[13]. Some changes are being promised to take effect this year.

[14].As quoted in Stapleford, op. cit. p.33.
[15] Bruce G. Webb,(from Bruce Wilkinson) “Is There Value-added in Christian Scholarship? The Case of Unemployment” Faith & Economics, Spring/Fall 2006,p.48
[16]. Op. cit. p.108.
[17] See Folsom, op.cit. p.11 for an example where an existing monopoly prevented the early American adoption of iron ships.

[18] The recent global recession (2008) has brought forward another reason to avoid concentration of power. Banks and automobile companies were bailed out by government because they were “too big to fail”–the consequences of failure on employees, suppliers and those depending on them would have been too massive to contemplate. Possibly, we should draw a lesson for the future to also take this criterion into account before permitting mergers and, even, perhaps encouraging break-ups of existing large companies. See  Small business, big business, subsidies and bailouts

[19] For example, it has been suggested that in Canada where there are only two railroads—not necessarily—geographically competitive in all areas, competition could be encouraged, in areas where there is not truck or marine competition, by giving alternate railroads “running rights” to compete on the monopolist’s tracks. Francois Tougas, “Abolish the Canadian Rail monopoly”, National Post, June 24, 2008, FP15.
[20]. Chewning, Vol. 2, p.167

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