Hafiz email -
Welcome to our Ask the Professor live chat. We are very fortunate to have professor Steven Horwitz with us again today. Please post your questions in the form below, and remember to periodically refresh your screen. I look forward to another great discussion!
EconChat email -
Dr. Horwitz
It seems as though, when a firm has the advantage of being the first to produce a good, they have an unfair advantage - in this case should they be regulated to provide certain products at a certain price? Or does the "threat" of competition work in the same way as actual competition?
Thanks
Steven Horwitz writes:
Yes, the threat does work the much the same way as actual competition. A firm who reduces quality or jacks up prices will attract entrants. And first entrants are often at a big disadvantage, having invested a great deal of R&D only to see later entrants come in and with similar products based on theirs. So no, first entrants do sometimes charge high prices, etc, but that’s mostly because they have the new product and have spent a great deal to bring it to market.
Flymetothemoon email -
What do you think of the current state of the North American airline industry? Is it true that increased competition is forcing many airliners to file for bankruptcy?
Steven Horwitz writes:
Well, having flown almost once a week this summer, I have lived it! It’s not increased competition that is the problem, but fuel prices that are causing all the losses. The competition has indeed forced prices down over the longer run and cut into their profit margins, but rising fuel prices and lower demand after 9/11 are the bigger problems.
Protectionist Pete email -
Some may argue that protection from competition may be beneficial in order to spur initial growth of an industry, especially in developing countries. I am curious to know your thoughts on the matter.
Steven Horwitz writes:
Bad idea. First of all, how does government know which start-up firms are the ones they should “spur”? The point of economic development is not to just “grow industry” in general, but to have an economy in which the firms that are growing are the ones who can produce what consumers want, and we can only know that through competition. Government is notoriously bad at picking winners – and, of course, its own support is part of what makes something more likely to be a “winner,” but that’s a very different thing from the firm passing the test of competition and really serving consumers.
Jesse Hamonic email -
Dr. Horwitz,
Many argue the need for patents and copyrights, in other words, government protected monopolies. They suggest that absent these protections, products in the sectors of pharmaceuticals, high tech, and others, would not be developed.
When such protections are granted, the power of competition is missing.
What are your thoughts on patents and copyrights? If protections did not exist, would innovation occur?
David email -
You're preaching the benefits of competition or the threat of competition, even when there are a small number of firms. But what about predatory pricing? If there are only one or two major players in a market, can't they just lower their prices temporarily? They'll make a loss in the short run, but if those low prices force their competitors out of business, it will allow the big companies to charge higher prices in the long run. Haven't the airlines been accused of this in the past?
BettyBoop89 email -
Isn’t there always a risk industry consolidation and thus monopolies/oligopolies as a result of the strategic acquisitions some companies use to compete? How can this be avoided while still promoting competitive markets?
Steven Horwitz writes:
Competition is not a matter of the number of firms, but whether there is freedom of entry and exit. When firms merge and consolidate, it is often the very way they are being competitive. Merging can be a more effective way to compete with other firms in the market. As long as entry and exit are open, the number of firms is far less important than the fact that they are engaging in competitive behavior.
Think about sports again: when the Red Wings sign Marion Hossa, we don't say that they've reduced competition, rather we say they are *being competitive* by trying to out-do the other teams in the NHL. Same with firms who merge: that is the way they are competing.
The market for cola drinks is dominated by two firms, Coke and Pepsi, but I don't think we'd say it's not competitive! They are after each other all the time.
AmericanWoman email -
I heard that Canada performs quite poorly compared to the US in terms of entrepreneurship and innovation. What are the main obstacles to competitive markets in Canada?
Steven Horwitz writes:
I don't know if I'd say "quite poorly" but definitely not as well. I think the obstacles in Canada are higher taxes and a less flexible labor market. The former discourages investment and innovation by reducing the rewards to it. The latter makes it harder for firms to shift their businesses around when old markets die and new opportunities arise. I'd also note that heavier regulations make starting up new businesses more difficult. Trusting entrepreneurs and markets more would go a long way to increasing Canadian competitiveness and entrepreneurship.
BigBoxBertha122 email -
Doesn’t free competition allow big-box Walmart-type corporations to put all the little guys out of business? Shouldn’t the government interfere to protect the interests of local businesses?
Steven Horwitz writes:
Ah, my favorite subject - Wal-Mart! There are two different answers to this question:
1. Stores don't put other stores out of business, consumers do. If a Wal-Mart comes in and then local businesses close, it's not Wal-Mart's fault, rather it's a choice that the community has made to shop at Wal-Mart rather than the local businesses. Perhaps Wal-Mart carries clothes in larger sizes than the local boutiques for example. Perhaps it charges much less for diapers and other necessities for poorer folks. Wal-Mart doesn't run other businesses out; people choose WM instead of the others.
2. The economic reality is that WM moving only leads to local businesses closing in the very short run. Over time WM actually attracts more business than it closes. For one thing, it puts more money in the pockets of the hundreds of people who work there who will now spend that on other businesses, and it also saves its customers money, who now have funds left over to spend elsewhere. Yes, some firms will find competing with WM tough, but more new businesses will emerge and grow than will be closed. There's plenty of research to support this.
Finally, your question points to the difference between being "pro-business" and "pro-market." I don't want to protect businesses, I want to make sure that consumers get the best deal, and that's what free competition do
Jonathan email -
How does competition apply to a sector like infrastructure, where the argument for monopolies is that having different providers is inefficient and chaotic?
Steven Horwitz writes:
At one level, we can never know for sure if multiple providers are, in fact, inefficient unless we allow competition to discover whether that's the case or not. So even if your argument is right at some level, it would not necessarily make sense to declare one firm the monopoly from the outset. Instead, we might wish to let multiple entrants sort it out and see what happens.
In the US 100 years ago, there were hundred of phone companies and they managed to find ways to share lines and coordinate with each other. ATT became the monopoly by pleading to the government to give them that monopoly, not because it was conclusively demonstrated that one firm was more efficient.
The other issue is technological innovation. People argued that you couldn't have competition in cable TV for much the same reason. But along came satellite and made that argument look a little silly. Same with long-distance phone. Once voice could be transmitted by microwaves, building phone lines wasn't necessary, and now with cell phones, we have tons of providers. The point is that prematurely declaring monopolies only slows down the innovation process. True competition is generally able to solve the sorts of problems you are raising.
Steve Horwitz email - myslu.stlawu.edu/~shorwitz
Jesse,
This is a great question and a tough one. Patents are easier - I think they cause more harm than good. You are exactly right that patents are monopoly grants by government and, once in place, they restrict competition and keep prices higher and output/quality lower than they would be otherwise. There is a fair deal of research in economics that indicates that even without patent protection, firms would still innovate due to the gains they can reap from being first on the market with something new. It's hard to imagine that a new AIDS drug wouldn't pay back its inventors many times over, even without a patent.
As for copyrights....
Steve Horwitz email - myslu.stlawu.edu/~shorwitz
...copyrights may be different. Here, copyrights can be seen as a kind of contract between the creator of an artistic item and the audience. I think there are some ways that artists could make such arrangements more explicit.
However, in a digital age, it's not clear at all that copyrights are a net social good, especially if they raise the cost of making works available easily to all. An artist might well do better by not copyright-protecting her work and allowing it to be spread more quickly over the web.
Bottom line: even economists who think free markets work very well disagree on the role of copyright.
David email -
You're preaching the benefits of competition or the threat of competition, even when there are a small number of firms. But what about predatory pricing? If there are only one or two major players in a market, can't they just lower their prices temporarily? They'll make a loss in the short run, but if those low prices force their competitors out of business, it will allow the big companies to charge higher prices in the long run. Haven't the airlines been accused of this in the past?
Steven Horwitz writes:
You're preaching the benefits of competition or the threat of competition, even when there are a small number of firms. But what about predatory pricing? If there are only one or two major players in a market, can't they just lower their prices temporarily? They'll make a loss in the short run, but if those low prices force their competitors out of business, it will allow the big companies to charge higher prices in the long run. Haven't the airlines been accused of this in the past?
Steve Horwitz email - myslu.stlawu.edu/~shorwitz
David,
This is an old and venerable argument. Two responses:
1. Who is hurt by "predatory" pricing? Not the consumer, at least in the short run! We get the benefits of the lower prices that the firm is providing.
2. Suppose it happens as you say. What's to prevent another firm from entering as soon as the "predator" jacks prices back up again? Won't that new entrant be able to snap up business from the now higher-priced predator? And if so, won't that lead the predator to lower prices and probably stop it from engaging in the behavior in the first place?
It's actually hard to find an example of this story in the real world. To the extent they exist, it's usually because there are some barriers to entry that are preventing the potential entrants from exercising a real threat when firms bring prices back up again. For me, as long as there is freedom of entry and exit, a firm who tries to drive out its competition by lowering its prices is just doing consumers are really big favor.
Hafiz email -
Great discussion so far! We have less than 15 minutes remaining in the chat, so if you have any more questions or would like to respond to one of Professor Horwitz's answers, please do so now.
David email -
Dr. Horwitz,
I agree with you that new entrants could snap up business from high-priced predators and that it would lead the predator to lower its prices. But I'm not convinced that this would stop a predator from engaging in predatory pricing if it could force each new entrant out of the market with below-market prices. And just as the threat of competition can keep a monopoly or duopoly in check, why can't the threat of predatory pricing keep small firms from entering a market?
If I want to start a small airline to compete against Air Canada on one or two routes and know that Air Canada can afford to lower its prices to make a loss in the short run in order to drive me out of business, why would I bother purchasing planes and trying to outlast Air Canada?
Steven Horwitz writes:
Well you'd have to make the determination of whether or not you think AC really can afford to do that or would be willing to go to that effort. If a smaller airline were able to offer a different mix of service/price and/or perhaps lease planes rather than buy them, they might think they could outcompete AC not purely on price but on the mixture of price and product. Seems to me that's what West Jet has done in Canada (having flown it to Edmonton from Ottawa a few years ago), as did Southwest in the US. One needs only think of the number of once-powerful US airlines that no longer exist or barely do so: Eastern, Pan-Am, Braniff, TWA. It was upstarts that got them.
Same with Microsoft to IBM, by the way.
So the view that it's just certain that the larger firm will win the battle is precisely what is at question here.
Hafiz email -
This concludes our discussion. Thanks for your participation in this month's chat. Please join us again on Friday August 29th!
