The Specter of Competition

In economics, we tend to define market competitiveness in terms of the number of actors (firms, individuals, etc) who participate in the market.  On one end of the spectrum, you have the perfect competition model, where there are so many buyers and sellers that no one actor can affect the price.  On the other end, you have monopoly/monopsony, where there is only a single buyer or seller.  The middle of the spectrum is some form of imperfect competition.

But is that definition sufficient?  For empirical and legal matters, it probably is, but what of economic matters?

In economics, there is often unseen (or “specter”) competition.  Specter competition, I call it thus, is competition that does not exist in any physical sense in the form of a rival economic actor, but is real nonetheless.  It hovers around the economic actor like an omen.  For example, a firm, despite having clear technical monopoly power, keeps its prices low for fear of attracting competition.  A real world example of this can be found with Microsoft (see Boudreaux & Folsom 1999 or McGee 1958).

Specter competition, because of its eldritch nature, can come from anywhere, and often does.  Furthermore, even legal barriers to entry appear to be useless against this form of competition (in fact, may actually attract it).  A perfect example of this is Uber:  Who’d have thought that mobile telephones, the Internet, and a bunch of bored folks with cars and extra time, would be a threat to taxis?  Many of these taxi companies had legal monopolies in their respective cities, but specter competition has torn down their barriers.

Firms, even monopolies, must be on constant vigilance for specter competition, lest they find their previously secure position under attack.  Therefore, I propose a slight addendum to Perry’s Law: Both seen and unseen competition breed competence.

4 thoughts on “The Specter of Competition

  1. Add cable franchises to that. Companies like Comcast do not fear direct competition. Their franchise agreement protects them from that. But gradually services like Hulu and Amazon and Netflix are making it possible for people to exist with connecting to cable. Worse, Comcast has so abused their monopoly power to provide poor service at high prices, that their customers are absolutely gleeful at the prospect of ditching them.

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  2. I understand Intel anticipated competition even though they couldn’t see any. It is said that their management structure was to leave the impression with the lower management that the upper management was constantly looking over their shoulder.

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    • phuenermund, you are correct. From what I understand, Baumol is referring to short-term entrants, whereas I am broadening the scope to include long-run potential entrants, plus technological changes that create new and unforeseen competition.

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