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There Are Two Dimensions to Market Competition December 7, 2009

Posted by Brian L. Belen in The Daily Grind.
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There’s theory, and there’s reality.

Theory tells us that consumers are best off under a regime that promotes free competition. The logic isn’t hard to follow: so long as profit opportunities exist, producers have an incentive to make things that consumers want and need. The more producers enter the market to take advantage of such opportunities, the fiercer the competition between them, with the end result that consumers enjoy access to better quality goods at the lowest possible prices. Producers win, consumers win, everybody’s happy.

Reality, on the other hand, is often much different, and not just because of the many imperfections that keep markets from operating along the lines of the idyllic “free” scenario (which are many and significant, but not the point, really). Consider: a business realizes that a particular market segment has unserved or underserved needs, and proceeds to create a product accordingly. Another business realizes the profit potential and attempts to penetrate the market as well, but not by producing the exact same thing, nor even one that’s technically better. Instead, it strives to compete by producing something “good enough” for the consuming public, even if it is capable of making something better. Why? Because ultimately what matters is not what consumers may want in the future but what they want right now; and as more producers seize upon this concept, the more they will vie for consumers’ attention by churning out goods with fewer bells and whistles and for cheap.

Hence, consumers benefit from lower prices and producers make some good money, but collectively the items or services on the market aren’t as good as they perhaps ought to or can be.

Yet this doesn’t necessarily imply that all competition is really just a race to the bottom. There’s a case to be made that truly exceptional, innovative businesses are successful by behaving as theory dictates in the face of market reality. However, they do so by recognizing that their principal competitor is not just the look-alike or startup across the way; really, they themselves are their own closest competitor. That’s why, say, Nokia comes up with new phone models every so many months that render their existing models obsolete, Apple keeps upping the ante with its iPods and notebooks, and Google deems it important to get involved in various Internet ventures.

As a result, it seems that everyone wins: producers earn a profit and ensure that they are the only ones in a position to put themsleves out of business, while consumers get access to innovative products they willingly pay for even at a premium — assuming they pay anything at all.

Ultimately reality is undoubtedly as messy as theory is pristine. But where competition is concerned, perhaps what’s missing in the paradigm is that businesses sometimes need not look beyond the confines of their organizations for their closest competitor, and that by doing so they can provide goods that consumers want in their entirety, at prices the market can bear.

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