We all know that “competition is good”. If we played word association and someone said “competition”, the first thing that tends to come to mind is – “is good”.
After all we all “know” that competition –
- Makes things cheaper (drives down costs);
- Drives out inefficiency;
- Spurs investment and innovation; &
- Results in improved customer service.
Stepping back, what is becoming increasingly clear is that we cannot continue with our economic system as is, simplistically it requires 3% annual growth to be sustainable. Which using the rule of 72, means we need the global economy to double in size every 24 years.
We also need to stop thinking the current system as “bad”, as it becomes too easy to blame some abstract evil entity such as “the man” or “the corporation“. They are a reflection of our society, a mirror or perhaps even a magnifying glass. We buy from them, we create them, we support them, we work for them, we are them. They have allowed for far greater levels of prosperity (whatever that means) across the board.
Brexit and Trump have shown us that far fewer people are satisfied with the status quo than naively believed. Ideally we would head towards something as aspirational as the Blue Economy (look out for a more detailed posting in the future). We are not emotionally and cognitively not ready for that yet. So if we want to avoid the pain and trauma of a revolution, we need to start questioning the basic premises of our economics system to allow for the evolution that needs to occur.
We need to adapt. Evaluate what is working and what is not. Unfortunately we are constantly looking for silver bullets. We spend too much time thinking we cant do anything. We need to move more to a solution mindset. Look for 1% improvements. 5 things that make a 1% difference can work out to a 20% difference. Challenging dogma is as good a place to start as any.
Conditions for competition
If you attend an introductory economics 101 lecture on economics, the lecturer will be quick to profess competition as the saviour and then quietly hedge that certain (very unlikely) conditions need to be met for it to work, including, but not limited to, the following:
- There needs to be a strong substitution option. So I can use (substitute) an alternate product or service that will give me a similar level of satisfaction.
- A large number of buyers and sellers, so that no-one has the power to set prices.
The lecturer will continue to explain how monopolies are often better where there are economies of scale. The lecturer’s tone will leave you in no doubt that this is very much the exception.
Premier League Football – BT & Sky Sports
This is a first world problem, granted, but it illustrates how good intentions do not always generate a good result. In the name of competition the right to broadcast football games are subject to a biding war, after all competition is good.
BT entered the bidding war against Sky for the rights to host football games, costs were driven up. Under the competition rules. No one can host all of the games, so they split them into buckets broadly by time of day. If you are a fan and want to watch all the games broadcast for your team, you need to have BT & Sky or miss some of the games. Every 3 years a new record deal is announced and I cringe, knowing I’ll be paying more in the name of competition.
A few years ago BT entered the market to challenge the largely monopolistic Sky, they started with a bang, charging only £5 p.m. for BT Sports and the right to watch Premier League games, of course then increased to £10 or free for a year if you had their broadband, HD was extra. When I cancelled last week it was costing me £26 p.m. Depending on what extras you get Sky costs a little more to close to double that.
A few years ago before the demise of Setanta UK, I was paying about £26 p.m. for both. With increased coverage, HD and inflation, perhaps it should cost £35 p.m. But every few months a love letter arrives explaining how additional content has been added and to cover the cost the prices have to go up just a little. We’ve added content! Typically all that is happening is it’s moving backward and forward between BT and Sky (and now Premier Sports?).
Dave sitting at home, doesn’t get more, he pays more. In the name of competition. The money goes to the leagues, to the players and I don’t believe any of those players wouldn’t be there even if they were earning half as much. 10,000s of potential fans are not watching as they cannot afford it.
It is not competition, Sky or BT that is the problem, it’s the unfortunate application of forced competition. An alternative option would be to have all the games on two or more channels, BT, BBC, Sky & ITV. Is Sky’s or BT’s quality of coverage sufficient to warrant the additional cost? – I can decide whose coverage to pay for, dependent on it’s value add to me. Perhaps a more feasible one is have all my team’s games on one channel.
This has been one of the most open failings of creating competition through privatisation in order to drive efficiency. There is a franchise system in place, where every few years companies bid to operate a franchise. But things are complicated further, there are different companies “looking after” the station, the railway track, the signalling, the trains and even the car parks. So when something goes wrong, no-one does or perhaps even can take ownership.
If there is a concern over market dominance leading to a monopoly, it can be referred to the Competition & Markets Authority (CMA). But I am not sure that the CMA understands this or the basic tenants of a competitive market. Let’s look at it more closely, if a train is cancelled from Streatham to Wimbledon, it could be Southern (Station), Network Rail (Rail tracks and Signalling), TFL (share parts of the route with Overground), Thameslink (Train), RMT (biggest union) or all of them to a more or lesser degree. I cannot take an alternative train. There is only one set of tracks, one train line operating. A bus takes 3 times as long.
Rail infrastructure projects can take many decades and the franchise system simply does not sufficiently incentivise proper investment. They will never make sense from a P&L perspective, but if you climb on to a London commuter train in the morning, investment in infrastructure makes perfect sense.
Utilities is perhaps closest to a competitive state, as no matter who my provider is, it’s the same gas and electricity. So my next question, is it better to have one company that is over staffed (the basic argument against it being state run) or 6 companies efficiently staffed?
There are definitely circumstances where competition is ideal, these are usually where it exists naturally. But many where it’s not, forced “competition” should not be applied dogmatically, there are better alternatives such as cooperatives, for purpose companies, state run enterprises and/or an independent oversight regulator. After all, we all “know” that competition –
- Makes things more expensive (drives up costs);
- Creates inefficiencies;
- Reduces investment and innovation; &
- Results in worse customer service.