April 18, 2010


Free competition is essential to a free market. Free competition between producers impels them to try to provide the best value for money to consumers. Free competition between consumers provides an adequate price to keep producers in business. Competition spurs the producers to ever increasing efficiency to bring down the cost, and the price of their products. It is competition that impels change and adaptation in production to keep up with consumers changing wants.

The opposite of free competition is monopoly. A producer with a monopoly has little incentive to innovate and reduce costs. With his monopoly, he can operate with big profit margins without the need to improve, innovate, or cut prices. His first priority, then, is to maintain his monopoly position.

Economists have long theorized that a producer can maintain his monopoly by undercutting the price of each competing startup until the startup fails. In practice, this doesn’t work. To survive, the monopolist would need to keep great reserves of money, a war chest, to take on all comers.

Monopolies naturally become inefficient and neglect innovation. New competitors will come on the market with greatly improved, cheaper products which no war chest can defeat. Wherever there is profit, competition will arise. Success in business is about recognizing and seizing opportunities. The way to maintain a monopoly position is to act as if there were competition, innovating and improving and reducing costs.

There is an easier means to suppress competition to maintain a monopoly: the political means. Government can provide the conditions to suppress competition. Protective tariffs can suppress foreign competition. Licensing laws and “friendly” regulation can entrench existing businesses. Such a monopoly cannot arise in a free market. Without government intervention to keep competition at bay, competitors will appear wherever there is profit to be made

There is, however, such a thing as a natural monopoly. A good example is the early telephone business. The first company to install the phone lines in any area had a strong advantage over new phone companies trying to set up in the same area. When people decided to install a phone in their home or business, they would naturally choose the company with the most subscribers. Soon Bell Telephone had a monopoly of phone service in most of the USA.

In time, Cable TV, providing combined TV, telephone, and internet, and Cell Phones provided the competition which ended the natural monopoly of the Bell System.

The Downside of Competition

Competition among producers benefits all of us as consumers. However, we are all producers, too. As producers, we find competition less welcome. We must hold our own in competition with others who might fill our jobs.

Your employer would welcome an opportunity to reduce his costs, either by replacing you with a more efficient or cheaper employee, or by installing capital equipment (tools), which reduce the number of employees he needs. Yes, we are in competition with tools, as well as other workers. The bottom line is that we must improve our skills, and accept whatever pay we can earn with our skills.

This doesn’t mean that, in the free market, those with less skill cannot earn a living. In a free market, free of minimum wage laws and government-granted Union power, there is work and opportunity for all, greater wealth for the more productive, and growing wealth for all as we develop our skills in the workplace.

The free market is a meritocracy. In the long run, we all live better than we would in any form of unfree market, with the exception of those who would use political power to enhance their earnings.


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