Is Competition Good or Bad?
Competition occurs when people or organizations reach for the same prize or goal at the same time. The prize might be a customer, a job, a grade, or an eBay item. When you think about it, there is little in life for which we don't compete. We must compete for nearly everything because nearly every resource on earth is limited, that is, every resource is scarce. Competition is therefore an inevitable result of the existence of scarcity, not a political or economic idea invented by capitalists.
For some, it inspires excellence. For others, it breeds discouragement or greed. As a fundamental part of economics, it affects how many options consumers have, how much goods and services cost, and how much innovation takes place. It creates winners and losers, and whether or not we like it, it is an important factor in a free and growing economy.
Economist Adam Smith visualized possible scenarios for competition in his famous treatise on The Wealth of Nations. If, for instance, vendors do not bring as many goods to market as people demand, the buyers may compete to get the good by offering to pay a higher price. On the reverse, if there are more goods supplied than demanded, the sellers might compete to get rid of their goods by lowering the price. Smith believed that competition generally produced the lowest price; whereas monopoly created the highest. Frederic Bastiat, another economist, said that competition contained the essential character of freedom, because it allowed individuals to make their own choices without coercion.
On the positive side, competition breeds innovation, because as sellers compete for buyers, they may try to make their products better and more attractive. Additionally, competition for government contracts is said to save government money. In education, a worldwide study indicated that market schools – such as private schools – tend to have higher achievement rates than schools run by government monopoly. Others advocate competition as a solution for problems in the health care industry.
Competition also has its dark side. For example, though competition is generally considered a positive incentive to further scientific research, it may actually hinder medical advances by producing contention or rivalry among scientists, rather than cooperation. Some say a highly competitive environment for kids risks hurting them physically and emotionally, and wish to discourage it altogether. In the business world, competition often means that some firms will fail, leaving people without jobs.
Over the years, government has stepped in with rules in the name of protecting competition. The fear is that monopolies or oligopolies (single or limited sellers in a market) will charge prices above the competitive level, and society will suffer because of lesser access to desired products. Some government officials appear to legitimately try to apply anti-trust laws in a way that preserves competition and efficient production. However, others say that instead of maintaining free and open competition, laws such as the Sherman Anti-Trust Act have really served to protect smaller, inefficient businesses from the big guy.
At other times, government intentionally protects so-called natural monopolies. For example, in the early years of electricity, it was natural for big power companies to develop economies of scale (or greater efficiency than smaller firms) once they paid their high start-up costs. Firms only survived the subsequent cut-throat competition by consolidating, which resulted in monopolistic power to set high prices. The government stepped in with regulation so it could dictate fair prices. At the same time, this structure set up barriers to entry for other firms by legally banning them from business. It also opened the door for monopolies to "capture" the interest of their regulators in a way that could prove unfair to customers in the end.
Special interests often seek government regulation in the name of protecting the consumer. But while regulations such as licensing may be thought to protect individuals from malpractice, it is often those who are already established in the business that push regulations to keep out competitors. For instance, some states have restricted hairbraiders from starting business unless they gain a full cosmetologist license, which would cost thousands of dollars and many hours of irrelevant instruction. In another case, attorneys in one state hindered outside lawyers from taking their bar exam unless they had attended an American Bar Association law school, regardless of their success at some of the hardest bar exams in the country. Sadly, when special interests lobby for new regulations, small businesses may suffer most.
On a level playing field, competition means failure as well as success. However, even failure teaches powerful, positive lessons, and nudges people to pursue goals they might be more successful at. Competition benefits consumers, the economy, and society in many indispensable ways. Competition for buyers motivates sellers to offer low prices; competition for jobs motivates people to work more productively; and competition for workers motivates employers to treat their employees well. In essence, when people compete to do something, they tend to do it better.
This topic offers a look at the theory and practice of competition and its positive and negative effects on life in a free society.
More About This Topic...
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- Monopoly and Competition: Government Intervention and its Effects on the Free Market
- Why Do Things Cost So Much? The Basics of Prices
- Regulations in America
- Quotes on Competition
- Economic Efficiency: Making the Most of Our Resources
- Lobbying & Rent Seeking
- The Role of Business and Entrepreneurship: Private Profit for Public Good?
- Single-Payer, Nationalized Health Care & Insurance
- Video: Regulating Monopolies: A History of Electricity Regulation