Can Competition be toxic?
Competition Overdose: How Free Market Mythology Transformed Us from Citizen Kings to Market Servants

Krithika Ramesh and Mihir A. Parikh review this book on the ways in which the free market economies has turned humans into ‘market servants’

The notion that competition will save us all has become a truism. Most private sector players, free-market politicians, and regulators think that greater competition will be the cure for all types of market failures. Every time, when the structure of an industry is disrupted and one company becomes dominant because of the economies of scale, innovative business models, or new technology, the prescription given is competition. Typical solutions to create artificial competition are break up the dominant player, significantly constrain the bigger players or offer special incentives to smaller competitors.

However, through this book, Profs. Stucke and Ezrachi, two prominent thinkers in the field of competition law, have raised important questions: While competition is considered good in most situations, can there be too much competition? When does it become an overdose? How do we end up having too much competition? Who is driving us towards too much competition? What are their underlying motives? When can competition become toxic? Who benefits from pushing toxic competition?

WHEN COMPETITION BECOMES TOO MUCH

The book transposes the readership from the narrow world of competition law to the wider philosophy underlying economic conditions and societal implications. The book suggests that competition enforcement has gone off-course and has led us to a ‘competition overdose’.

The first overdose occurs when competition becomes a race to the bottom. It happens when competitors’ individual interests are not aligned with their collective interests (or with the society’s collective interests). The authors offer the example of hockey players. The rules in hockey require players to wear protective gear. Protective gear reduces the player’s agility but increases safety by preventing injuries. Without these rules, when some players compete without protective gear, they would gain a competitive advantage in the short term. This will prompt all players to copy and abandon protective gear. In the long-term, this behaviour will affect the entire sport in terms of the sidelining of good players, frequent interruptions during the play and disruptions in team strategy for the game due to injuries that could have been prevented. In such a scenario of a race to the bottom, the competitors or the intended beneficiaries of competition – or both – are harmed, but no one can independently de-escalate it.

The second overdose is quality degradation. The authors point out that the pressure of keeping costs down can cause firms to skimp on product quality, safety standards, and environmental safeguards. This saves money for firms, but at the cost of human misery. Inter alia, the authors highlight that instances like the horsemeat scandal in Europe reveal that, competitive price pressure can cause rivals to secretly degrade quality (by adding horsemeat to beef products) and undermine safety, just to survive.

The third overdose is the elixir of ‘privatization’. The authors are not against privatization, but they warn against implementing it blindly. They tease out the narrative that led to private prison facilities in the U.S. Private prisons were created to improve conditions of correctional facilities in a cost-efficient manner. It was hoped that privatization would lead to faster reform of inmates and therefore, ultimately the reduction in the incarcerated population and prevention of future crime. However, the authors argue that the business models of private prison mirror that of motels. Under this model, the longer a person stays locked up in a private prison, the more profitable it is for the private prison. This conflicts with the societal goal of reintegrating the inmate safely into society as early as possible and offering a fresh start to inmates who show no evidence of recidivism. When an inmate is kept in the prison, society loses out in both ways: tax revenue expensed to keep the inmate behind bars and tax revenue lost by delaying the reformed inmate from rejoining the society as a productive member. Thus, privatization increases competition, but not necessarily bring the intended benefits to society.

The fourth overdose is the exploitation of human weaknesses through a combination of marketing gimmicks like choice overload and drip pricing. The authors trace examples from court cases and actual business practices to exemplify the changing nature of competition - from sellers trying to figure out how best to attract buyers by raising quality standards, improving service and reducing the price to trying to figure out how to extract most revenue from buyers by exploiting them, especially in the sectors created or reshaped by emerging technology. They rely on research that showed that increased competition caused cell phone providers to focus on raising profitability by creating confusion and gaining from consumer mistakes by making choices more complex, rather than charging monopoly prices. The authors point out that similar marketing gimmicks like choice overload are generally acceptable in all utility and energy contracts, insurance policies and health plans.

The problems identified by this duo from the UK and the US are universal. They are increasingly relevant to developing countries like India that offer a huge consumer base but possess relatively low countervailing buyer powers. Chicago School economist, Stigler undertook research that showed that consumers in developing countries were likely to be disadvantaged in terms of resources required to make informed buying decisions. This means that the government must bridge the information gap by equipping the consumer. In the Indian context, this has happened through laws that regulate food safety and standards. The authors remind us that the protective measures need to be revisited as the economy progresses with time.

CAN WE TURN TOXIC TO NOBLE?

While competition can often produce an efficient outcome, policymakers rarely add the qualifiers – competition does not always yield the good, fair, or just outcome, and can be at times downright toxic.
The authors ask that the reductionist ideology of competition being pixie dust be substituted with ordoliberal-sounding principles, which are better suited to protect society from exploitation. The authors believe that we can do this by effectuating competition law in line with its intended outcomes. In the context of hockey, it was encouraging rivalry while ensuring player safety as opposed to competition at all costs.

The authors suggest that many policymakers and government officials operate under the delusion of self-correcting markets, in which the collective self-interest of all the competitors is supposed to eliminate the need for regulation. However, few markets, if any, match this simplistic vision of perfect competition, where fully informed, self-interested buyers and sellers interact with few transaction costs. As a result, almost every market is regulated. The closest thing we have to perfect competition – the stock market – is also heavily regulated to prevent competition from turning toxic.

In the above context, the authors argue that just because some regulations stifle economic growth, does not mean all regulations should be viewed as bad. According to the authors, once the regulations that put limits on toxic competition are eliminated, then the inspections, minimum safety requirements, and requirements for transparency and truth in advertising required by those regulations also disappear.

IS THIS ANTI-COMPETITION POLICY PROPAGANDA?

The book is a memorandum on how competition policy on its own will not act like pixie dust. The authors suggest that competition must be intentionally nurtured. Their key purpose in the book is to re-align competition enforcement with its essence – securing products and services for consumers at optimum prices that are sustainable in a long run with the desired minimum quality levels.

The idea that competition can ever be bad can be jolting and even absurd in the beginning. Some may even see it as anti-competitive policy propaganda. But, the authors remind us with compelling examples of how in the modern world we don’t want to see the shrapnel; maybe because we are perfectly happy with the low prices.

The book signals that when competition ideology reigns supreme, unrestrained competition compromises on certain services – like universal health care or kudzuie. veiling exploitation by evangelizing the virtues of the competition ideology and arguing favour of minimal state consequences by prescribing a reductive competition ideology. Competition, for instance, is not able to eliminate exploitative practices like drip pricing, which are spread across many seemingly competitive markets. The authors observe that policymakers rarely disabuse the simplistic notions associated with what competition can achieve on its own.

The simple (yet courageous) message is that competition is not the goal, but the means to a goal. The book challenges the notion that competition policy should not be concerned about the product or prices as long it appears to be the outcome of competitive markets. Competition is a means to securing quality products and services at optimum prices. If competition policy is unable to secure this goal, it should be obvious that the underlying policy needs tweaking. The authors’ remarks show how difficult it is to reset an entire ideology that has accepted without reservations that the ‘invisible hand’ of competition would secure consumers.

The authors do not ask for competition analysis outside markets or support populism. They ask that we be on the lookout against reductive policies and ask policy proponent to unpack the tangible efficiencies they see in a proposal they support.

India is at the watershed moment of interpreting the policy considerations underlying its competition law. Keeping the message that competition policy is only as good as we design it to be, would make it an indelible feature for future interpretations of the law.

On perhaps a more idealistic note, the objective of backing a law with the principles of economics is to do good for the people. Better quality and lower prices directly benefit people (especially the lower-income groups). Competition policy, if we attend to it now, can help us do this in the near future.

While the premise of the book is thought-provoking and the elaborations of the authors are agreeable, finding a normative solution that is enforceable in most situations is elusive. Every legal theory has its downside. There are cases when it works beautifully, while in some cases it can bring a disaster. Competition law is no exception. The authors discuss moving to noble competition, but it seems like a pie in the sky. How that can be achieve using a legal regime remains to be seen.