Thursday, March 07, 2013

On The Origin Of Competition


When you think about it, competition makes a lot of sense.

If I can only buy something from one particular shop, then that shop can set its prices at whatever level it feels like in the knowledge that I have no choice but to buy it from them. Particularly if that item is something that I really need in order to survive.

Competition is the reason our planet, and indeed our species, looks the way it does today. Over billions of years different plant and animal life has learned to out compete others, in order to make best use of the conditions and resources available to it. In terms commonly associated with (but never actually used by) Charles Darwin, it's survival of the fittest.

So if instead of being able to buy my gas from just one supplier, or use just one bus or train company to get me to work every morning I had a choice of two or more, it stands to reason that I would get a better deal, right?

These businesses are going to be competing for my money. They'll be falling over themselves to offer the best service at the lowest prices in order to get my business rather than have it go to their competitors.

That's the theory at least, behind a lot of economic and political ideology.

So why doesn't it work? Why have welfare to work programmes contracted for on this basis failed spectacularly to deliver? Why do utility prices continue to rise? Why do service standards and cost to the customer seem to be drifting apart in the wrong direction on public transport?

It's us. Homo sapiens. In particular, the first world variety.

We're greedy. That's not an insult. I'm not using it as a pejorative term here. It's our greed that has enabled us to survive and flourish as a species. We understand the value of having resources and keeping them to ourselves.

Once upon a time that might have been having the biggest stash of berries in the settlement, or the most number of goats on your particular farm. These days it's about having as much cash in your bank, or your pension pot, or on your company balance sheet as you can possibly get.

If you're a business, you do that by winning and keeping as many customers as you can. The best way to do that, so the ideology says, is to keep your prices low and your service standards high. Give people good service at reasonable prices and they'll keep coming back. Problem with that, is that it tends to eat into your profit margins.

If you're not making profits, then you're not an attractive proposition for those investors with the really big money to sink their capital into. Not Joe Public, who buys and sells the odd few shares here and there and fancies himself as a bit of a trader, but the pension funds and hedge funds who have billions to invest, all in the interest of making money for their own investors.

Drive down costs, keep prices as high as you can get away with and you'll have these big boys beating a path to your door in search of a quick return on their clients money. If you can get together with your competitors on the quiet and all agree to set your prices at a particular level, then there's money to be made for everyone and no need to really compete. Instead of struggling to get to the trough and having the weakest starve, just agree to build a longer trough.

So we've tried competition as a business model, and found it sadly lacking for the end customer in the utilities market, in train and bus travel, in telecommunications.

So why on earth does anyone in their right mind want to introduce it wholesale into the way we educate our children, or the health services required to keep us alive?

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