Competition is probably considered by everyone as an indispensable requirement for the proper economic functioning of a society. This is indeed justified because competition encourages producers of goods to look for the best ways of satisfying customers, for example by trying to offer them goods of better quality than others, or cheaper goods. But we ...
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Competition is probably considered by everyone as an indispensable requirement for the proper economic functioning of a society. This is indeed justified because competition encourages producers of goods to look for the best ways of satisfying customers, for example by trying to offer them goods of better quality than others, or cheaper goods. But we still need to know exactly what competition is all about. There is essentially the same conception of competition in terms of public opinion and traditional economic theory. The latter proposes what is called the theory of pure and perfect competition, and it is this theory which is found in all the teachings and all the microeconomic textbooks. This theory essentially consists of contrasting competition and monopoly. A monopoly in the production of a good is considered to exist when there is a single producer of that good, as opposed to a situation of competition. This traditional theory shows that a producer, thanks to his monopoly position, can obtain a higher price from his buyers than in a competitive situation. The monopolist thus succeeds in optimizing his profit (although the existence of a high price reduces the quantity sold). But this approach to competition and monopoly must be considered wrong for reasons that we will explain below.
It may be useful to take a topical example, that of the so-called GAFA (Google, Amazon, Facebook, and Apple). It is generally believed that these companies are monopolies, according to the traditional definition, and that economic policies should therefore be implemented to challenge or eliminate this situation, since it is assumed that this necessarily has negative consequences for customers. This is why some governments want to punish them—one might say—by trying to impose high taxes on them. The European Union has already imposed fines on GAFA producers and is currently trying to put in place regulations to reduce the so-called monopoly position of the GAFA. The same is true in many countries, such as the United States.
In fact, the existence of the GAFA should be used instead to challenge the traditional theory of competition and monopoly, as we will do. First of all, it can be pointed out that the definition of a monopoly (and therefore of competition) in traditional theory is arbitrary, for several reasons. Thus, when we say that the producer of a specific good is a monopoly because he is the only one to produce the good in question, it is obviously necessary to define the good in question clearly. Let us take an example: suppose there is a single producer producing tiles with two colours; for example, blue and red. Should we speak of a monopoly in the production of red and blue tiles or should we not rather ask whether there is monopoly or competition in the production of tiles? Indeed, competition encourages producers to do better than others and that is why there can be a single producer of red and blue tiles without it being considered a monopoly.
The following question, among others, can also be seen as an obvious criticism of traditional theory. Take the example of an innovative entrepreneur who imagines a new product and begins to produce it. He is obviously the sole producer of this product and there is no reason to claim that he constitutes a monopoly in the production of this product (when it is precisely competition that has prompted him to innovate). It is possible that later on other producers may decide to produce the same product, and it will then be said that there is competition, whereas competition has always existed. This is the kind of situation that can be considered to be a bit like that in the case of the GAFA. The relatively recent development of computer techniques has led to the creation of producers considered monopolies by traditional theory.
There are many reasons to believe that the traditional theory of competition and monopoly is not justified, which is why I consider that different definitions are needed. Thus I define competition as a situation where there is freedom to enter a market (or to create a new market), whereas monopoly is the result of a constraint that prevents freedom to enter a market (or to create a new market).1
However, the GAFA can be seen as further evidence of the erroneous nature of the traditional theory. Indeed their activities exist and are useful precisely because it is indispensable to have a single producer of each of their activities. Take, for example, the case of Google. This company is very useful for everyone in the world precisely because it can provide all the information that exists in the world. It would be much less useful for all those who are looking for precise information if there were a large number of companies that could provide information (in which case each company would specialize in a particular field, making it more difficult for individuals to find information). It should therefore be considered that having only one large company in the world for a particular activity is indispensable in this case. Moreover, there is freedom to enter the market and if there are no (or few) companies offering the same services as GAFA it is precisely because it would be harmful.
Google (but also Amazon) is also generally criticized for offering products sold by commercial companies under the pretext that this is detrimental to other commercial companies. However, this role of intermediary is extremely useful, since it allows the concerned companies to make themselves known (almost worldwide), whereas they would probably find it very difficult to advertise. It is also very advantageous for potential customers to have access to information on a very large number of commercial companies, which would be impossible without Google and Amazon.
Thus the existence of the GAFA results from the fact that there is freedom of entry into the markets and that it is satisfying for a very large number of people in the world that each of these computer companies corresponds to what traditional theory wrongly calls monopolies. And it is quite unjustified that many political authorities wish to punish these companies or even possibly to impose a dismantling of them (for example, Facebook is currently threatened with dismantling in the United States) under the pretext that monopolies are harmful and that therefore each of them should be replaced by several companies.
Generally speaking, it would be highly desirable not to punish companies such as the GAFA, but to abolish competition laws and regulations based on traditional theory, as well as specific organizations that control competition. It is regrettable that governments are wasting resources to enforce a misconception of competition. Of course, the European Union should stop being concerned about competition, as should many countries in the world.
Furthermore, according to the theory of monopoly and competition proposed above, a monopoly must be defined as a production activity in which constraint prevents freedom of entry. This constraint is necessarily a public constraint. It should therefore be admitted that private monopolies do not exist (unless the public authorities give a privilege to a producer by prohibiting other producers from entering the market) and that monopolies are necessarily public activities. It may be considered that traditional theory is wrong to define competition and monopoly on the basis of the number of producers of a good, but it is right to stress that a monopoly has harmful consequences. This is indeed the case with public monopolies. They may impose prices that are too high or, of course, be financed by questionable tax levies. Of course, one may be tempted to say that competition exists for public activities to the extent that members of the political authorities are elected, i.e., there is competition for elections. But the fact remains that there is no competition for monopolists.
If competition is rightly valued, it should be possible to condemn and abolish public monopolies. One could imagine, for example, from an ideal point of view, that individuals - producers or customers - would have the right to file a complaint in court against public monopolies, for example by indicating what the gain from competition would be. As an example, one could imagine a legal recourse against the public monopoly of health insurance which exists in many countries. Competition between health insurance private firms would make it possible to develop systems that are better suited to the needs of the insured and more fairly funded.
- 1. I proposed these new definitions of competition and monopoly in my book, Competition and Free Trade (London: Routledge, 2017).