The perils of competition

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Promoting competition is considered the best available option for increasing economic well-being. The recent global financial crisis prompted policymakers to reconsider basic assumptions, but the virtues of competition were not among them. However, gone are the days when practitioners slept sound thinking the economy, if left alone, is self-correcting.

The limitations of competition as a force for universal good are well-known. Consumers can be inadequately informed, making it possible for firms to take advantage of them. The intrinsic difficulty of matching skills to positions and the costs associated with moving jobs may make workers stay with abusive employers. More basically, in a world where people have imperfect information and workers can’t always leave their employer, firms may be able to respond by cutting corners and abusing consumers and workers.

Is the problem with competition itself or the legal and informal institutions that yield this type of competition? The answer depends in part on one’s ideological lens—namely the belief of competition existing outside a regulatory framework, necessitating governmental intervention in the marketplace versus the belief that regulatory forces help create, define, and nurture competition in the market, necessitating improvements to the legal framework if competition is failing.

Some policies that supposedly restrict competition are justified for promoting competition. Intellectual property rights, for example, can restrict competition along lets say the use of a trade name. But the argument is that intellectual property and antitrust policies complement, rather than conflict, one another in promoting innovation and competition.

Life will surely be more stressful if we needed to compete for everything. Cooperation is often more relaxing. Society and competitors at times benefit when rivals cooperate in joint ventures to address collective needs. Competition can make people less cooperative, promote free-riding, and reduce contributions to public goods, thus leaving society worse off.

The point is not all forms of competition are beneficial. Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition. Bangladesh’s garment industry is a contemporary case in point.  The collapse of Rana Plaza in Bangladesh brought to the fore the pathetic state of working conditions in many factories serving the global supply chains. The structure of the supply chain itself—the relationship among regulators, buyers, suppliers, and workers—is fundamentally related to these problems. 
The practice of subcontracting is routine in Bangladesh’s garment industry. The prevalence of competitive indirect sourcing strategies has resulted in a supply chain driven by the pursuit of nominal cost minimization. It has increased risks for business and workers by undermining prices, wages, working conditions, and investment in productivity and quality. The apparel units engaged in sub-contracting are mostly non-compliant particularly in paying wages and maintaining safety standards.

Question is why do compliant factory owners take recourse to such sub-contractors? Major global buyers see Bangladesh as a market where they can obtain the most competitive prices for a high volume of lower end products. Consequently, they set low price targets. The manufacturers compete for large orders by undercutting each other, further driving down the prices. They make delivery commitments far in excess of their capacity to produce without breaching compliance. When prices are dramatically driven down, the natural tendency of a garment manufacturer is to manage their unit at a least cost with regard to overheads and wages. The pressure to drive these down arise inevitably.

While the major recognized buyers look for the cheapest prices, their requirements in terms of factory compliance are quite high. However, low prices make it difficult for an average manufacturer to keep up with ethical practices. While manufacturers can undertake enough physical compliance measures to please the buyers, maintaining social compliance on a daily basis when buyers are not looking over their shoulders becomes an extraordinarily difficult task.  It involves reinvestments for which they receive no financial assistance from the buyers. Even after the Rana Plaza tragedy, the financial and logistics support the buyers promised did not really materialize.
These days the garment owners have begun saying at least in their living rooms that they need to be saved from ‘ruinous’ or ‘cutthroat’ competition.

Competition benefits society when individual and group interests and incentives do not conflict. Under such circumstances profits can be attained, not through a competitive race to the bottom, but in helping address collective needs. This is not the case in Bangladesh’s garments where competition has proved to be a race to the bottom.

The billion dollar question is the following: If competition in a market economy is not always good, a separate institutional issue is whether private parties should be allowed to deal with these types of failures or whether legislation is required. Once it is recognized that market competition produces at times suboptimal results, the debate shifts to whether the problem of suboptimal competition can be better resolved privately or with additional governmental regulations. Even if one concludes that private restraints are the solution, the economic literature has not developed an analytical framework sufficient for courts and agencies to apply.

Society may prefer that the more publicly accountable elected officials should decide when competition is suboptimal.  Some may fear this weakens competition advocacy. Rent-seekers will use the exceptions as excuses to restrict socially beneficial competition in order to extract rents for themselves. But to effectively advocate competition, advocates must understand when more competition is the problem, not the solution. In better understanding instances when competition does more harm than good, the advocates can become smarter reformers.

Photo: An Worker in a garment factory in Dhaka, 2013. Mahfuzul Hasan Rana / World Bank


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