There are enormous obstacles for economics in order to sustain the price stability, lower unemployment rates, quality production, the variety of consumer choice and research and development (R&D). I have found a “Batman” to deal with these and other else types of economic problems, who can successfully cope with the significant majority of such problem, which is called “competition”.
My argument is that competition as an instrument has unique and great power to help economic policymakers to solve the problems such as higher price volatility, higher or abnormal unemployment rates, low quality of goods and services, low consumer choice and ineffective R&D. I want to begin with the effects of competition on the higher price volatility problem first, and then I will briefly go through the others. Price volatility or instability mainly occurs in the monopolistic, oligopolistic or other types of less competitive markets. These groups can manipulate market and prices, which make hard to enter the market for small and medium entrepreneurs, where the only price setters are those who dominate the market. Strong competition will give equal powers to suppliers, and one’s price manipulation will be impossible, that in the end, this manipulator may lose its market share. So, it is nearly impossible to set prices which are above the market equilibrium price in the highly competitive markets, thus competitors will follow different ways to get more income, such as quality amplifications or R&D engagement measures. This market chain will automatically increase the quality of production and R&D activities.
If the market is less competitive or monopolistic, which means producer surplus or profit is great and the demand is inelastic, so for producers, the quality is not a big concern, because they have obtained their intended earnings and do not have competitors. In contrast, in highly competitive markets, the producers cannot easily increase prices without quality contribution, and the quality issue can be the main source of profit. Moreover, the quality is first priority not only for current producers but also more vital for the new market entrants as well, since they do not have market share and reputation as others have. Sustainable quality in the competition requires more R&D activities in order to keep or increase the market share for companies.
As the quality of goods and services in the competitive market is the only determinant of income for companies, the R&D is one of the primary ways to compete and increase market shares. Because, through R&D it is possible to attract new customers, by using several types of developments such as cost reduction, quality improvement, new design or augmentation of customer satisfaction. By the way, the R&D activities entail high skilled human and physical capital, which have positive impacts on education, research institutes, overall exports and eventually on the whole economy. According to the latest Global Innovation Index report in 2018 (Figure 1), it is possible to see that more innovative countries, in other words, countries that are very effective in R&D are only high-income countries.
Figure 1: Global Innovation Index rankings, 2018
Source: Cornell University, INSEAD, and the World Intellectual Property Organization, 2018
Note: World Bank Income Group Classification (July 2017): HI = high-income, UM = upper-middle-income
It can be interesting for us, whether R&D is the outcome of the competition or not. In the recent Global Competitiveness Index (GCI) report of World Economic Forum in October 2018 (Figure 2), we can explicitly notice that there is a positive relationship between per capita Gross National Income (GNI) and GCI. That can be interpreted as, competition fosters R&D activities, which has a huge contribution to the income level of nations.
Figure 2: Global Competitiveness Index, 2018
Sources: World Economic Forum analysis; World Bank 2018; national sources.
Note: GNI = gross national income (Atlas method), natural log transformation. 2014 data is presented for Venezuela, and 2016 data is presented for Taiwan (China). N=140, R2 = 0.82.
Appreciated level of domestic competition creates many types of producers who want to compete and increase their customer satisfaction. Many producers in the market mean greater availability of consumer choice. Namely, consumers can have access to several types of goods and services, which is hard to achieve in the monopoly or in other types of market imperfections.
An effective level of competition gives an opportunity to the domestic company to catch up with international competitors and increase the level of production, what we can easily observe in today’s global economy. Competition helps domestic companies to achieve high quality, internationally competitive and low-cost production, which can boost exports, and logically, decrease the unemployment rates. In more details, if a company wins the domestic competition with both domestic and foreign competitors, then there is a good potential for that company to reach to the global market. Eventually, global market access for companies creates extra employment and as a result, unemployment level decreases. Since in monopolistic economy, there are very few market entrants and very low level of competition, and logically higher prices, which decreases the potential level of production and employment.
Consequently, my argument is that lack of competition has negative impacts on both domestic production, consumers and exports of the economy. Briefly saying, less competitive market is more prone to have volatile prices, lower quality of goods and services, less R&D, lower consumer choices and higher unemployment rates. This trend is also possible to observe in today’s economies as well, where more competitive economies are wealthier and innovative than those who are less. Therefore, I consider the sense of competition as a “Batman” for economies, like an invisible hand, which must be supported by the policymakers and markets.
References
- Global Innovation Index, 11th Edition, Cornell University, INSEAD, and the World Intellectual Property Organization, 2018 Available on:
https://www.globalinnovationindex.org/Home
- Global Competitiveness Index, World Economic Forum analysis; World Bank 2018, Available on: https://www.weforum.org/reports/the-global-competitveness-report-2018
Junior Economist 