Competition and the Market Process

Lecture handout: Competition and the market process*

Textbook Reading: Chapter 5 (pp. 135-164)

Half of all U.S. publicly traded companies have disappeared within ten years of entering the market (West, 2017, p.12)

The point of this session is to critically examine the economic theory of competition, by contrasting “competition as a market structure”, with “competition as a behavioural activity”. This turns the debate away from market concentration, towards the issue of contestability and sustained competitive advantage. We also see that competition is the driving force of the market process, and how this relates to regulation. Indeed a cynical view is that anti-trust is simply the strategic use of government powers by incumbent firms to restrict competition.

The lecture mentioned the tricky case of patents, which are one of three areas of intellectual property:

  • Patents protect inventions
  • Copyrights cover creative works
  • Trademarks cover brand names

A timely example of anti-trust is the tech industry. See this article by Russell Brandom explaining the case against Amazon, Apple, Facebook and Google. By contrast, Megan McArdle says ‘Yes, Google has a monopoly: who cares?‘ I recommend Ben Evans’ discussion of tech giants and definitions of market share, and this tl:dr primer on why mergers and acquisitions are so important for the tech industry by the International Centre for Law and Economics.

I highly recommend Benedict Evans’ newsletter (no relation), particularly these articles:

Prior to becoming Chair of the Federal Trade Commission, Lina Khan, wrote a 2017 article ‘Amazon’s Anti-Trust Paradox‘ that pointed out that the traditional concern of competition authorities – that monopolists would use their market power to raise prices – is inappropriate when considering modern technology platforms. However, her stringent views on regulatory issues seem to neglect the concept of creative destruction. There’s a long list of examples of companies that appeared to be in a dominant position, undermined by the perennial force of competition.

Here’s a great thread on the same issue:

In 2023 Lina Khan was interviewed by Planet Money, and I found it interesting how she pursued her biggest cases primarily on the grounds of potential outcomes, and then defended them by claiming that they signalled that the authorities were going to be increasingly litigious and active. This antagonistic attitude struck me as being quite far from the original role of competition authorities, which is to ensure an even playing field and to prioritise consumers.

Compare that to the defense industry, with this great graphic showing consolidation over from 1980-2001:


Sometimes I think that I’m using a straw man argument to suggest that an arbitrary 25% market share is used by serious people to determine policy. And then I see Rana Foroohar write this in the Financial Times (May 8th 2023):

Bertrand competition shows how the act of competition can take place even with just two companies. In fact, the concept of competition doesn’t rely on the number of competitors at all. For example this advert reveals how Usain Bolt’s lack of “competition” doesn’t prevent him improving himself.

This is a good explanation of the side by side market/firm diagram, and the process by which perfectly competitive firms make zero profit in equilibrium.

Some good examples of daft occupational licensing are in this Twitter thread.

This is a nice example of the difference between complements and substitutes, and whether external economies of scale mean that more competition benefits the competitors:

Consider the following points:

    • What is the value?
    • Are targeted ads better for the consumer than uniform ones?
    • Is Facebook merely a platform? Or a media company?
    • Re network effects: Is it a natural monopoly?
    • How do you regulate zero price products? [Don’t monopoly on pricing power! Do it on barriers to entry.]
    • Barriers or costs?
    • Why do they want to be regulated? Why do you think the congressional hearings took place?
    • Who owns your metadata? Are they really your likes?
Learning Objectives: Contrast competition in a static sense, defined in terms of market concentration, with competition in a dynamic sense, defined in terms of contestability. Understand the difference between barriers and costs.