Freeman

ARTICLE

How Much Competition?

APRIL 01, 1976 by BRIAN SUMMERS

Mr. Summers is a member of the staff of the Foundation for Economic Education.

One of the arguments used against free enterprise is that there is too much competition, that the business world is "dog eat dog" and "cutthroat." Another argument used against free enterprise is that there is too little competition, that the business world is dominated by monopolies and oligopolies. Opponents of liberty, it seems, believe in touching all bases.

Is there too much competition? Is there too little? How much should there be?

Let us answer these questions by examining the more basic question: What is the meaning of business competition?

Unfortunately, many people try to answer this question by counting noses. If a given industry has many firms, they call it "competitive." If an industry has few firms, they call it "noncompetitive."

A little reflection reveals the shortcomings of this criterion. It tells us the number of firms in an industry, but it doesn’t tell us what they are doing. And if a nose count doesn’t tell us what the firms are doing, it certainly doesn’t tell us if they are competing because competition, if it is to have any meaning, must refer to actions, not just the number of contestants.

What, then, is the meaning of business competition? Well, what do businessmen do? The answer, of course, is they try to earn profits.

And the only way businessmen can earn profits is by cutting costs of production, since there is very little they can do about the selling prices of their products.

To see this, first consider costs of production. The businessman can choose from a wide variety of known production processes; he may even develop a new process. Clearly, there is much the businessman can do to try to cut his costs by making more efficient use of his men, materials, and machines.

Once his products are finished, however, there is little the businessman can do except name an asking price and wait. If people buy his product, fine. If they don’t — if they prefer the products of his competitors — he has little recourse other than to lower his asking price, perhaps by offering rebates.

And who are his competitors? They are the manufacturers of identical products, similar products and, in fact, all the other producers who bid for the consumer’s dollar. Each businessman must also take into account the potential competitors who stand ready to enter his field the moment his profits start to look good. Thus, General Motors competes with Ford, Chrysler, American Motors, foreign auto makers, the manufacturers of motorcycles, bicycles, buses, trains, and airplanes, the potential manufacturers of these items, and everyone else who hopes to win the consumer’s approval. The folly in attempting to count competitors is now apparent: In a free market, all businessmen are competitors.

Free market competition benefits everyone. It encourages businessmen to introduce new products and make efficient use of resources. It yields profits to those who give consumers what they want and losses to those who don’t. Profits enable efficient producers to expand production, while losses stimulate inefficient producers toward greater efficiency.

Too much competition? That is like asking if there is too much efficiency and not enough waste. Too little competition? Only when government licenses, franchises, and other regulations prevent people from entering a given field. How much competition should there be? Let all people be free to compete in a market economy, an economy that offers a fair field, with no privileges or favors available from the government.

 

¹ E. Mishan, "Ills, Bads, and Disamenities: The Wages of Growth," in The No-Growth Society, eds. M. Olson and H. H. Landsberg, W. W. Norton and Company, 1973, pp. 81-82.

² For a more complete discussion of this case, see Louis M. Kohlmeier, Jr., The Regulators: Watchdog Agencies & The Public Interest, Harper & Row, 1969, pp. 121-128.

³ See Peter M. Blau and 0. D. Duncan,

The American Occupational Structure, New York, Wiley, 1967.

***

Ludwig von Mises

THERE IS in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best LIBERTY and cheapest way with all the goods they ask for.

ASSOCIATED ISSUE

April 1976

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