What is competition? What is competitiveness?

Competition between private actors in markets is often a good thing, but it can be harmful too.

Competitiveness – as in the competitiveness of whole countries, or states, or regions, or economic sectors – is very different. It sounds wonderful (after all, who would want to be uncompetitive?) But once you start to examine the concept it falls apart in your hands.

Healthy Competition

When private companies compete for customers, they continuously strive to produce better goods and services, at lower cost, to stay ahead of their competitors. When they compete for workers, they need to offer better employment conditions, to attract and retain the best employees. And so on. Healthy competition often delivers widespread benefits to society.

As in sports, market competition needs good referees to stay healthy, or more nefarious actors – such as monopolists – will take over. For example, our research on mergers in the telecoms sector shows an example of healthy competition, and how the benefits disappear as competition shrinks.

Harmful Competition

We certainly need to break the power of dominant firms, including by breaking many of them up into smaller pieces. But the goal is not simply to blindly increase competition in private markets – because without due care, we will end up with harmful competition. This happens when companies seek to gain a competitive advantage by doing anti-social or dangerous things, such as by being more willing than their competitors to burn cheap coal, or by being laxer in their money-laundering controls, or by being more willing to use risky financial engineering to take profitable risks at taxpayers’ expense.

For example, our forensic research into the ‘market’ for children’s social care in the UK shows how the wrong kind of competition can cause great damage. Predatory actors are often more profitable than their more responsible peers, so they can out-compete them, and if regulators do not step in, these actors will take over their sector, and there will be ‘competitive contagion’ as other actors feel pressured to become more predatory, if they want to stay in the competitive race.

The national competitiveness myths

Some countries, states or regions believe that they must pursue their own national (international) “competitiveness,” if they are to prosper. Yet any good economist knows that competitiveness is a largely meaningless concept, when applied to a country or state.

As one famous economist put it, “a government wedded to the ideology of competitiveness is as unlikely to make good economic policy as a government committed to creationism is to make good science policy.”

This is, of course, a complex area. We co-signed a letter signed by nearly 60 economists from around the world, which unpacks the concept and lays out the issue, in simple detail. (For more details, click here.)

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