Ever since the days of Adam Smith, economists have accepted the dogma that free and fair competition leads to optimal outcomes. It is good for consumers as they pay the lowest possible prices, and it also forces producers to be efficient. Socially, it leads to most productive allocation of aggregate resources. The competitive process just makes everybody pursue their own self-interest, but somehow miraculously the net outcome is socially beneficial to all. Smith famously illustrated this by pointing out that people get food not because of the charity of the butcher and baker, but because they earn their living by selling at the best possible prices, in competition with other butchers and bakers.
Over the past 200 years, the dogma that free competition leads to best economic outcomes has not remained unquestioned. But the questioning has been about what constitutes “free and fair” competition, not about the benefits of competition itself. The competition dogma pervades our daily lives, not just in global or domestic trade, but also in areas like school admissions and exams, sports, health and, of course, politics. Much of modern economic policy is about promoting free and fair competition, and leaving the rest to the marketplace. Indeed, one can safely claim that the most far-reaching reform in modern India was the abolition of industrial licensing to compete. This unleashed competitive forces, leading to huge gains for consumers as well as producers. Similarly, lowering of trade tariffs and barriers increased foreign competition, which again has been mostly positive for the economy. If there is any grouse against foreign competitors, it has been about non-level playing field (the violation of the “fair” clause), and not about competition per se.
The recent establishment of the Competition Commission is again to promote, not restrict, more competition.
The one question that remains mostly unasked, and sounds almost like an economic heresy, is: Is there such a thing as too much competition? When does it begin to hurt consumers and society?
In the financial world, such questioning is not new. The Lehman crisis has, in fact, led to an emerging dominant view, that it was unbridled competition (and not just lax regulation, or generous monetary policy) that caused the crisis. Policy-makers in the western world are busy putting in place measures to restrict competition, at least as compared to pre-Lehman days. Even the International Monetary Fund (IMF) now advises against allowing unrestricted capital flows into and out of developing economies, as that kind of competition for returns on capital is unhealthy for unprepared markets, which are not deep enough.
But our concern about too much competition is more local and less abstract, and not about financial markets. Take the case of telecom. Indian telecom players in fierce competition among themselves have many pioneering innovations, which contributed to robust growth at the lowest cost in the world.
Some of these innovations are outsourcing of all tech-related work and focussing only on customers and brand. Second is the innovation of sharing of towers among otherwise competing players. (We can call this co-opetition). But ever-increasing competition has resulted in sub-optimal outcomes for all. Consumer satisfaction levels are falling due to increased congestion. Pricing wars have decreased everybody’s profitability. Even the 3G auction, which caused so much euphoria, is already mixed with grave concerns about the sector’s viability. Many rating agencies have downgraded the sector. The competition for the spectrum was fair and transparent, but may have contributed to the winner’s curse. Even before 3G, the number of players in most circles in India is the highest in the world, leading us to the question, is this a case of too much competition?
Or, take the case of low-cost air travel in India. Again a story of pioneering innovation by competing players, leading to massive growth and consumer benefits. This is a sector which grew even when global players were filing for bankruptcy protection. But increasingly customer satisfaction is down, delays are mounting, stories of wasteful circling of airports are common. A case of too much competition?
Another example is from the microfinance sector. As this sector bloomed, it contributed hugely to financial inclusion. It was served by pioneering and competitive microfinance institutions reaching out to rural women. There were several innovations in delivery, record-keeping, cash management and build-up of self-help groups. But lately there are stories (hopefully premature, and certainly not rampant) that there is a bubble building up in this sector. Multiple lenders are chasing the same borrower groups, leading to loan-pushing. The borrowers are mostly rural women, and loans go toward livelihoods or small businesses which then sell within the village or local region.
But beyond a point, the extra loans will simply re-circulate, and not lead to newer businesses. Possibly a subprime phenomenon in the making. A case of too much competition?
It is possible to enumerate examples from a variety of sectors, such as proliferation of engineering colleges (now running with empty seats and no faculty), or proliferation of TV channels with scant increase in consumer or social welfare to underscore the point about too much competition. The other stark example comes from the Election Commission (EC), which reports an almost daily growth in registered political parties. At last count, their number was getting closer to 1,000, with the EC having no power to deregister them. Here too, one wonders what additional consumer welfare is generated from the mushrooming of competing political parties.
But returning to the economic arena, let’s take this heresy a bit further. Even if you grant for a moment that there is such a thing as too much competition, the more basic question is who gets to decide?
We are then left with the ugly prospect of returning to the pre-1991 days of licence raj, if we go along with this “excess competition” logic. Smith’s paradigm was embellished by Joseph Schumpeter, who claimed that competition is actually a series of temporary monopolies, created by one-upmanship of competing innovators. This is what leads to creative destruction of companies, as newer and more innovative ones replace older, complacent and ultimately uncompetitive ones. Hence, even though the spectrum for telecom or the open skies for airlines may be looking overcrowded, there is no such thing as too much competition! Perish this heretical thought.
The author is chief economist, Aditya Birla Group. The views expressed are personal
