What is competition?

“Competition” is one of those terms whose definition everyone assumes he knows. Most people would say they like it and would welcome more of it, but they are usually more enthusiastic if it’s “the other guy” and not themselves who has to deal with it.

So what exactly is “competition?” I define it as “striving for excellence in the service of others for self-benefit.” That may sound excessively rosy but it’s eminently defensible.

What about a restaurant that doesn’t seem to be striving for excellence at all, where surly waiters bring poor food to your table at a high price? Everyone has been to one or two of those. But a competitive market does not mean that everybody is equally competitive. The most competitive firms are those that work the hardest and the smartest to provide the quality and service that consumers desire most at the best price. They do so not because they like or even know you, but because, in a free market, that’s how businesses survive, grow, and do well.

What about a firm that crosses the line and uses fraud, deception or even theft or violence to get ahead in the marketplace? Its leaders may be motivated by competition but their actions no more invalidate competition than liars invalidate free speech. Free societies don’t condemn or prohibit a positive good just because a few abuse or misapply it.

              What about a company that cuts its costs and prices, introduces new and better products, and does these things so well that other companies lose customers? Well, that’s what it means to “compete” and we’d be inconsistent if we said we wanted all companies to compete but no company to actually win. You wouldn’t think of stopping a horse race in the middle and complaining that one of the horses was ahead. The same should be true of free markets, where competition is a dynamic, ceaseless process by which the leader today can easily become the follower tomorrow.

Many people think that competition is directly related to the number of sellers in a market. According to this popular notion, the more sellers there are, or the smaller the share of the market any one of them has, then the more competitive the market. But competition can be just as fierce between two or three rivals as it can be between ten or twenty. In a free market, even the biggest of companies facing no obvious competition must behave as if it were surrounded by competition or else it soon will be. Even John D. Rockefeller’s famed Standard Oil faced grueling competition but in an effort to make profit for itself, it proved to be one of the most competitive firms ever to serve consumers. See http://fee.org/media/video/standard-oil/

Moreover, “market share” is a slippery notion. Almost any market can be defined narrowly enough to make someone look like a monopolist instead of a competitor. I have a 100% share of the market for articles by Lawrence W. Reed, for example. I have a far smaller share of the market for articles, generally.

Markets are inherently competitive when the incentive for profit is allowed to work, though sometimes it takes time and investment for new competitors to make a difference. Governments don’t have to “decree” competition; all they have to do is prevent and punish force, violence, deception, and breach of contract. Enterprising individuals will compete because it is in their financial interest to do so.

Competition spurs creativity and innovation. It prods producers to cut costs and prices. It encourages improvements in quality. It gives consumers choice. It keeps us on our toes. The fact is, competition is what happens when markets are free and rarely if ever is enhanced when politicians decide to intervene, protect, regulate or subsidize.

For a classic lecture on competition, see http://fee.org/media/video/competition-and-monopoly/