What does it mean to be competitive?

Expert Economists Jorge Padilla and Salvatore Piccolo authored an article for Concurrences’ On-Topic February issue on the circumstances under which a firm can be regarded as competitive and whether it would be correct to conclude that only companies operating in fragmented markets and acting as price takers can be regarded as such.

In this paper, we discuss whether it is correct to restrict the qualification of competitive to those firms that act as price takers. That is, whether it is right as a matter of economics to conclude that only firms that, while able to compete with others offering goods that are no less desirable at costs that are not too high, are unable to affect the market price should be considered competitive.

We conclude that this narrow interpretation of what a competitive firm is, which is the one adopted by many competition laws around the world, is incorrect. Price takers compete aggressively but they are not the only firms to do so. We show that firms run by empire-building managers can be very aggressive even when they possess market power and that the same is true for firms where managers are paid if their firms are the most profitable. That is, we find that firms can be competitive even in concentrated markets where their output decisions determine prices, provided their managers are not just trying to compete, but to strive to be the best.

What is key to ensuring that markets deliver outcomes that benefit consumers – i.e., efficient or competitive outcomes – is that firms are compelled to compete on merits, promoting their sales but refraining from undertaking actions that undermine their rivals’ sales. Aggressive managers, as well as managers incentivised to act aggressively in the marketplace, deliver competitive outcomes to the ultimate benefit of consumers but only when they are restricted to compete by enhancing the value and appeal of their offers or by expanding their franchises. Managers that seek to prevail by undermining their rivals, e.g., raising their costs and/or blockading their sales, should be shown a red card. Those managers may be regarded as competitive in common parlance, but their competition is nefarious. Competition among such managers, ready to wage an all-out war against their rivals by all means, including by infringing on their property rights, may cause the market to collapse, in which case we could say that the market died of a “competition overdose”.

In conclusion, this paper emphasises conduct over structure, incentives over size, and in so doing contradicts those who place the focus on market concentration and ex-ante structural intervention and invites readers to reconsider the importance of regulating a firm’s behaviour ex-post.

Read the full article here

Accreditation: An article from Concurrences’ On-Topic February 2022 issue, “Competition overdose: Exploring the limitations, searching for the treatment”. The full publication is available here. (Subscription is required)