Why is perfect competition the worst

Right on, Seth. Firms always want to keep market power, and avoid competition. The policies and rules we make need to allow for some market power to incentivize innovation, but not so much that firms can continually escape the Bertrand competition.

Point is that there is not a definitive answer on the right level of market power. Nominal growth is achieved by spending, real growth is achieved by breaking monopolies. If you cancel every patent, copyright, etc.. The traders will diversify unless they have reason not to, like being granted the privilege of taxing the rest of society.

Also, instead of expecting the real world to speed up to match the financial world, which is folly, we should be slowing the financial world to match the real world. Perfect competition leads to zero economic profits, but not zero accounting profits. Firms still earn a required rate of return on their products. Patents and copyrights are like the cream on top, which may or may not be necessary to promote innovation.

So what if accounting profits are non-zero? There is a reason we distinguish between accounting profits and economic profits. If you drop the economic profits to zero, then acct. So why would anyone invest in a new innovative firm if they could earn the same return in an index fund with far less risk? His example is that Japan at the beginning had a very weak car industry, who produced only Does this mean that competition and growth not only rules within a country only but as well on the international level of the market?

Which lays another layer of trade-off in my opinion. Where do you see Schumpeters-Growth-Model at the open market level? I guess in general the difference is the commercial use for some of the innovation?

This is a good example of how neoclassical ideology gets economics wrong. It makes simple assumptions and extrapolates the wrong conclusions.

For one, profit is far from the strongest motivator to innovate. The workers who do the actual innovating scientists, researchers, engineers, etc. According to Dan Pink, the research says people are motivated by autonomy, mastery and purpose.

Three, open-source software has made a significant contribution to innovation without a profit motive. Four, there is no direct relationship between stronger property rights and stronger long-term economic growth.

Certainly patents provide an incentive to innovate. But long time-period patents can impede the pace of innovation innovation is built on top of innovation. Frivolous software patents get in the way of software innovation. Five, patents only protect big corporations with an army of lawyers.

Small players are not only not helped by patent laws, they can be preyed upon by patent holding companies. Innovation lay elsewhere. This is consistent with theory and historical evidence: monopolists are not good innovators. Seven, competition also leads to innovation. As the saying goes, necessity is the mother of invention. Compare broadband internet between North America — which is controlled by oligopolies — to Europe where basic telecommunications infrastructure is regulated by government leading to more competition.

According to the Harvard study Next Generation Connectivity, the European model leads to greater innovation as well as lower prices. For example, two merging firms may well argue that ongoing competition will leave them with insufficient profits to make valuable and necessary investments to serve consumers. One could argue that the problem is not economic competition per se, but poor regulatory controls.

This is a valid point. This article identifies the problem as competition itself, since under most theories of competition, markets characterized with low entry barriers and recent entry should not be prone to the market failures described herein. The Ordoliberal, Austrian, Chicago, post-Chicago, Harvard, and Populist schools, for example, can disagree over how competition plays outs in markets, the proper antitrust goals, and the legal standards to effectuate the goals.

But they unabashedly agree that competition itself is good. Antitrust policies and enforcement priorities can change with incoming administrations. Some policies that ostensibly restrict competition are justified for promoting competition.

Intellectual property rights, for example, can restrict competition along some dimensions such as the use of a trade name. But the belief is that intellectual property and antitrust policies, rather than conflict, complement one another in promoting innovation and competition.

First, consumers can pay more for poorer quality products or services, and have fewer choices. Second, governmental or private restraints can raise exit costs and inhibit innovation. Competitors, challenged by new rivals or new forms of competition, may turn to regulators for help. Competitors may ask governmental agencies under the guise of consumer protection to prohibit or restrict certain pro-competitive activity, such as discounts to their clients. They may enlist the government to increase trade barriers or for other protectionist measures.

Finally, impeding competition can cause significant anti-democratic outcomes, like concentrated economic and political power, political instability, and corruption. As the previous section discusses, competition, given its virtues, is the backbone of US economic policy. But competition, while often praised, is also criticized. Life would be more stressful if we competed for everything. Competition cannot always be preferred over cooperation. Cooperation is often more appealing and socially rewarding.

Social and religious norms exclude or curtail competition in many daily settings. Commuting to work, in theory, is not a competitive sport. Parents should not foster competition among their children for their affection.

Nor do the mainstream religions endorse a deity who wants people to compete for His love. Antitrust norms do not translate easily in these social or religious settings. Some goods and services are not subject to market competition. One example is human organs. This is not fixed. Markets once considered repugnant eg lending money for interest, life insurance for adults are no longer. Markets that are repugnant today eg slavery , once were not.

The US antitrust laws apply across most industries and to nearly all forms of business organizations. But the Court noted: Surely it cannot be said … that competition is of itself a national policy. To do so would disregard not only those areas of economic activity so long committed to government monopoly as no longer to be thought open to competition, such as the post office, cf.

It would most strikingly disregard areas where policy has shifted from one of prohibiting restraints on competition to one of providing relief from the rigors of competition, as has been true of railroads. Some or all economic activity in various industries is expressly immunized from antitrust liability. Economic activity, even if not immunized, may fall outside the scope of the antitrust law.

But Sherman did not see: any reason for putting in temperance societies any more than churches or school-houses or any other kind of moral or educational associations that may be organized.

Such an association is not in any sense a combination arrangement made to interfere with interstate commerce. Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition. The law of unfair competition has developed as a kind of Marquis of Queensbury code for competitive infighting.

The antitrust community would debate over what constitutes fair and unfair methods of competition, but agree that not all methods of competition are desirable. The community would likely tolerate price and service regulations in some industries eg natural monopolies where competition is not feasible. For most other commercial activity, however, competition on the merits is the presumed policy. As one American court observed: The Sherman Act, embodying as it does a preference for competition, has been since its enactment almost an economic constitution for our complex national economy.

A fair approach in the accommodation between the seemingly disparate goals of regulation and competition should be to assume that competition, and thus antitrust law, does operate unless clearly displaced. In condemning private and public anti-competitive restraints, competition officials and courts invariably prescribe competition as the cure.

But that is a function of market conditions, not competition itself. Competition itself cannot cause market failures. Economist Irving Fisher over a century ago examined two assumptions of any laissez-faire doctrine: first, each individual is the best judge of what subserves his own interest, and the motive of self-interest leads him to secure the maximum of well-being for himself; and, secondly, since society is merely the sum of individuals, the effort of each to secure the maximum of well-being for himself has as its necessary effect to secure thereby also the maximum of well-being for society as a whole.

Competition policy typically assumes that market participants can best judge what subserves their interests. Suboptimal competition can arise when firms compete in fostering and exploiting demand-driven biases or imperfect willpower. To illustrate, suppose many consumers share certain biases and limited willpower.

Competition benefits society when firms compete to help consumers obtain or find solutions for their bounded rationality and willpower. Providing this information is another facet of competition—trust us, we will not exploit you. The credit card industry provides one example. Some consumers do not understand the complex, opaque ways late fees and interest rates are calculated, and are overoptimistic on their ability and willpower to timely pay off the credit card purchases.

For other credit card competitors, exploiting consumer biases makes more sense than incurring the costs to debias. Alternatively, the debiased consumers do not remain with the helpful credit card company.

Instead they switch to the remaining exploiting credit card firms, where they, along with the other sophisticated customers, benefit from the exploitation such as getting airline miles for their purchases, while not incurring any late fees. This problem, of course, can arise under oligopolies or monopolies.

But here entry and greater competition, as one recent survey found, can worsen, rather than improve, the situation: The most striking result of the literature so far is that increasing competition through fostering entry of more firms may not on its own always improve outcomes for consumers. Indeed competition may not help when there are at least some consumers who do not search properly or have difficulties judging quality and prices … In the presence of such consumers it is no longer clear that firms necessarily have an incentive to compete by offering better deals.

Rather, they can focus on exploiting biased consumers who are very likely to purchase from them regardless of price and quality.

These effects can be made worse through firms' deliberate attempts to make price comparisons and search harder through complex pricing, shrouding, etc and obscure product quality.

The incentives to engage in such activities become more intense when there are more competitors. Second, after identifying these consumers, firms must be able to exploit them. But firms, like consumers, are also susceptible to biases and heuristics. In competitive settings—such as auctions and bidding wars—overconfidence and passion may trump reason, leading participants to overpay for the purchased assets.

If repeated biased decision-making is not punished, the problem is too little, rather than too much, competition. Given the cost of losing, it is also illogical to enter a bidding war.

But if everyone believes this, no one bids—also illogical. If only one person bids, that person gets a bargain. Once multiple bidders emerge, the second highest bidder fears having to pay and escalates the commitment. Bazerman and Moore analogize their experiment to merger contests. Competitors A and B, in their example, fear being competitively disadvantaged if the other acquires cheaply Company C, a key supplier or buyer.

Firms A and B may rationally decide to enter the bidding contest. Both are better off if the other cannot acquire Company C, nonetheless neither can afford the other to acquire the firm. Here clear antitrust standards can benefit the competitors. If they both know they cannot acquire Company C under the antitrust laws, neither will bid. Antitrust, while not always preventing the competitive escalation paradigm, can prevent overbidding in highly concentrated industries where market forces cannot punish firms that overbid.

Suppose the first assumption Fisher identifies is satisfied—people aptly judge what serves their interest, which leads them to maximize their well-being.

One avoids the problem of behavioral exploitation and perhaps the competitive escalation paradigm. Competition benefits society when individual and group interests and incentives are aligned or at least do not conflict. Difficulties arise when individual interests and group interests diverge.

One area of suboptimal competition is where advantages and disadvantages are relative. Hockey players are another example. Hockey players prefer wearing helmets. But to secure a relative competitive advantage, one player chooses to play without a helmet. The other players follow. None now have a competitive advantage from playing helmetless. Collectively the hockey players are worse off. A recent example is Wall Street traders who inject testosterone to obtain a competitive advantage. They and society are collectively worse off.

Below are five additional scenarios where competition for a relative advantage can leave the competitors collectively and society worse off. Today corporations and trade groups spend billions of dollars lobbying the federal and state governments.

Microsoft now spends millions of dollars annually on lobbying. The Supreme Court quickened the race to the bottom when it substantially weakened the limitations on corporate political spending, and thereby vastly increased the importance of pleasing large donors to win elections. These corporations fear that officeholders will shake them down for supportive ads, that they will have to spend increasing sums on elections in an ever-escalating arms race with their competitors, and that public trust in business will be eroded.

A system that effectively forces corporations to use their shareholders' money both to maintain access to, and to avoid retribution from, elected officials may ultimately prove more harmful than beneficial to many corporations.

It can impose a kind of implicit tax. When auditor Ernst and Young recently surveyed nearly chief financial officers, its findings were disturbing: When presented with a list of possibly questionable actions that may help the business survive, 47 per cent of CFOs felt one or more could be justified in an economic downturn.

Worryingly, 15 per cent of CFOs surveyed would be willing to make cash payments to win or retain business and 4 per cent view misstating a company's financial performance as justifiable to help a business survive. While 46 per cent of total respondents agree that company management is likely to cut corners to meet targets, CFOs have an even more pessimistic view 52 per cent. To prevent the competitive process from being undermined, the enactment of an economically sound competition law and the establishment of a competition agency with the powers and resources to effectively enforce that competition law are imperative.

It must always be remembered, however, that competition law itself requires government intervention in the workings of the market in order to ensure that the activities of market participants do not undermine or distort the competitive process. And, unfortunately, enforcement of a competition law can have negative consequences on competition and on the economy as a whole if the law restricts too broad a range of conduct, if it is too inflexible to changing markets, or if its enforcement is not based on sound economic analysis.

Let me give you just two examples of how misguided competition policy can have harmful effects on an economy. The first is in the area of merger enforcement. Mergers can, of course, harm the competitive process where, for example, a merger between competing firms eliminates competition between the parties and provides the merged firm with the power to raise price or exclude competition.

At the same time, mergers can also increase competition and benefit consumers by creating efficiencies that could not be effectively realized without the merger. If a competition agency blocks a merger because it creates a more efficient firm that may be able to out-compete its rivals, the economy will suffer.

A second example relates to enforcement against low pricing practices. One of the fundamental benefits of competition is that it forces companies to compete vigorously in terms of price and quality.

Although there are limited cases where low pricing can harm competition -- primarily where a firm with market power tries to drive all of its competitors out of the market through sales below cost so that it can act like a monopolist and raise prices to recoup its earlier losses a practice known as predatory pricing -- for the most part, vigorous price competition is good for consumers and helps business consumers compete more effectively through lower input costs.

Competition agencies should be extremely reticent about challenging low pricing behavior, especially where engaged in by firms with no prospect for exercising monopoly power. To avoid these pitfalls, the first thing we need to do is to agree on the objectives of competition law and on our definition of competition.

As I said at the beginning of my talk, misguided competition policy, designed to maintain fragmented markets or protect small business, retards growth and undermines faith in free markets. In the United States, we believe that the sole objective of competition policy is consumer welfare. This means, to repeat one of my favorite sayings, that "efficiency is the goal, competition is the process. Once we agree on the objectives of our antitrust laws and on our definition of competition, it is relatively easy to develop a set of guiding principles to follow in implementing those laws.

Detection and prosecution of hard-core cartels should be the top enforcement priority of every competition authority. Cartels -- whether in the form of price fixing, output restrictions, bid rigging or market division -- raise prices and restrict supply, harm consumers, and act as a drag on the entire economy. The large potential harm, combined with the huge potential gains to cartel participants and the difficulties of detection, require tough measures in order to deter cartels from being formed.

That is why in the United States we treat cartels as criminal enterprises, pure and simple, and prosecute both the companies and the individuals who perpetrate them. Over the last ten years the Antitrust Division has successfully prosecuted more than companies and almost individuals for engaging in illegal cartel activities. We believe there are four important elements to any effective anti-cartel program.

The first is a per se rule against hard-core cartels that does not require the agency to prove harm to competition and does not allow parties to claim an efficiency justification. The second is fines for the companies involved that are large enough to have a strong deterrent effect. Given the difficulty of detecting cartels, the maximum monetary penalties we impose in the United States are now five times the amount of damage done.

The third is criminal sanctions against the individuals involved, both to deter such conduct and to provide an incentive to cooperate with our investigations in exchange for immunity or a lighter sentence.

The fourth is an effective leniency program, to give companies the same incentive to turn themselves in before their co-conspirators do. Our second principle is that competition laws protect competition, not individual competitors. Competition agencies should not be in the business of picking winners or protecting losers, or of seeking to ensure that existing competitors survive.

Thurman Arnold, one of the most famous leaders of the Antitrust Division, pointed out some sixty years ago that "[the antitrust laws] recognize that competition means someone may go bankrupt. They do not contemplate a game in which everyone who plays can win.

Making life harder for rivals will generally force them to work even harder to keep up, multiplying the benefits to consumers. The third principle is a close corollary of the second: efficiencies should play a central role in our analysis of allegedly anticompetitive conduct.

As the June OECD Interim Report on Convergence in Competition Policies states: "[T]he basic objective of competition policy is to protect and preserve competition as the most appropriate means of ensuring the efficient allocation of resources, and thus efficient market outcomes, in free market economies. The fourth principle is that we need administrable standards to assure that our laws do not unduly interfere with the competition we are trying to protect.

We all know that legal institutions are not omniscient and that some error is inevitable. We also all know that fact finding in competition cases is costly and that those costs can deter efficient conduct. Finally, we all know that there is a trade-off between cost and the risk of error -- a system that strives to eliminate all error would almost certainly be too costly to administer. As we design the analytical frameworks and decision rules we will use to apply our competition laws, and especially as we try to incorporate the best economic learning into our decision-making, it is also important to remember that while technical economic discussion helps inform antitrust laws, those laws cannot precisely replicate the economists' views.

Unlike economics, law is an administrative system. Rules that embody every economic complexity and qualification may well prove counter-productive by, for example, discouraging legitimate price competition. The fifth principle grows out of the need to prevent competition enforcement from becoming politicized.

As an economy grows, and the stakes become ever larger, firms are naturally driven to seek protection and help from their governments.

They can be expected to try to use the competition law as a weapon against their competitors. The best thing competition agencies can do to prevent competition enforcement decisions from becoming politicized is to make sure our decisions are soundly grounded in economic theory and fully supported by the empirical and factual evidence. We must also ensure that our decision-making is transparent and fair, and that parties and complainants have an opportunity to provide their perspective before a final enforcement decision is reached.

Sixth, competition officials, like doctors, should take a sort of Hippocratic oath: before intervening, we should be confident that our actions do not cause harm. Competition authorities should be law enforcers, not industrial policy makers who try to move industries in a certain direction or dictate particular market results.

Dictating industrial policy is not the proper role of a competition authority for a very good reason: the long-term and, in some industries, even the short-term predictive powers of competition enforcers are limited. Over the course of my twenty-five-year career as an antitrust lawyer, I have been amazed over and over again at how markets evolve -- often in ways that even the most sophisticated of industry participants were unable to anticipate.

In the United States, we have much more faith in the self-correcting nature of markets than we do in our own ability to predict their future course. The seventh principle is that we should work hard to ensure that the competition laws do not themselves become bureaucratic roadblocks to efficient transactions. A vigorous, competitive, free-market economy produces a whole host of agreements and transactions every day.

The vast majority are pro-competitive or, at worst, competitively neutral. We enforcement authorities should therefore continually take stock of our procedures to be sure that only those transactions that raise legitimate competitive concerns are delayed and that we are stopping only those that are truly anticompetitive.

Finally, competition agencies should be as flexible and dynamic as the industries with which they deal. We must make sure that competition law adapts to changes in technology and in the economy.

In particular, we should recognize that in our new, knowledge-based economy, competition in some markets is driven more by innovation than price. New-economy industries frequently require very large and risky upfront investments that will not be made without the promise of a substantial return. Too much government interference will frustrate innovation and discourage efficient practices to the detriment of consumers worldwide.

On the other hand, a totally hands-off approach could lead to high prices and frustrate the emergence of potentially superior technologies -- also to the detriment of consumers.

We need, therefore, to constantly be studying the dynamics of these markets and incorporating new learning about those dynamics into our enforcement decisions.