Over the weekend, I had the great opportunity to meet a local distiller, Alex Laufer of One Eight Distilling, a company in Washington DC. Alex’s operation was fascinating to learn about from the perspective of an economist. He also provided some excellent insight into the nature of competition.
Being a distilling company that makes gin, bourbon, rye, and vodka, One Eight is competing against big companies like Jim Beam, Jack Daniels, Stolichnaya, Beefeaters, and the like. His prices, like other craft distillers, tend to be higher than these big brands. Alex knows he cannot compete solely on price; his scale and operation do not allow for that. Instead, he competes on uniqueness and quality. His gin uses more peppery ingredients than the competition. His bourbon and rye are similarly peppery. He produces a unique product. One Eight is able to (ably) carve out a niche in the liquor market and successfully compete against the Big Boys.
What’s interesting is, from a purely theoretical perspective, One Eight’s behavior is not, strictly speaking, competitive. In a “perfectly competitive” market, all firms compete on price and price alone. Only by lowering marginal cost can they compete. In a sense, the theory of perfect competition is not one of competition at all.
One Eight’s form of competitive behavior, that of product differentiation, is deemed “imperfect competition.” It’s considered “monopolistically competitive” and, in straight theory, may be frowned upon as being economically inefficient compared to the perfectly competitive model. But, in a “perfectly competitive” world, One Eight would not exist. It would not be able to price low enough. We, as consumers, would be denied uniquely flavored gin, bourbon, rye, and vodka. In short, there’d be less diversity in the market, leading to fewer people being able to satisfy their preferences. I like Jim Beam, but I like One Eight even better. In a perfectly competitive world, I’d still be better off consuming Jim Beam than nothing, but I’d not be as well-off as I am in the “imperfectly competitive” world of One Eight.
The perfectly competitive market is often touted as some golden standard of competition; regulation is used to try to move the market to this idea (eg, antitrust regulation). But, ironically, such regulation tends to reduce real competition.