Competition is the driving force behind capitalism, the engine that fuels innovation and provides incentive for growth. Adam Smith’s famous concept of the “invisible hand” is supposed to lead to effective allocation of resources through competition and ultimately result in the best outcome for consumers. American values have always been abstractly pro-competition, but our institutional makeup does not always reflect those principles, especially today. In a sharp contrast from the focus on antitrust regulations marking much of the 20th century, the last two decades can be characterized by an increase in consolidation and an oligopolistic streak among top firms. The Economist found that of the approximately 900 sectors that make up the American economy, two-thirds became more concentrated between 1997 and 2012, with the weighted-average share of the revenue of the top four firms in each industry rising during that time from 26 percent to 32 percent. And despite the fact that entrepreneurship has become a trendy concept in popular culture with the rise of Zuckerberg-style founder stories, the birth rate of new firms in the United States has declined from over 13 percent in the late 1980s to around eight percent in 2015.
The impacts of this trend toward consolidation are potentially worrying, depending on your vantage point in the marketplace. Shareholders in consolidated industries have benefited from abnormally high profits, though it can be argued that businesses' use of these profits for dividends and buybacks is shortsighted. Customers and employees, though, are likely worse off. Without a healthy level of competition in the economy, consumers face higher prices and fewer choices, and employees must contend with the fact that firms in consolidated industries can afford to pay their workers less given the lack of other options.
The same phenomenon has played out in politics. Former Gehl Foods President and CEO Katherine Gehl and Harvard Business School's Michael Porter explain in their 2017 report, “Why Competition in the Politics Industry is Failing America,” that the political system is unique in its position as “a private industry that sets its own rules.” They argue that polarization, special interests and big money are merely symptoms of this root cause — a design flaw in the system. The advantage of incumbency and the dominance of the two major political parties only serve to exacerbate this systemic weakness. The book recommends four pillars for reform: restructuring the election process, restructuring the governing process, reforming money in politics and opening up near-term competition without waiting for structural change. None of these changes are particularly simple fixes given their fundamental nature, but they are also too important to ignore.
Economic competition cannot increase without government regulation, from enforcement of antitrust laws to prevention of predatory pricing practices and support of labor rights. Firms in our current system cannot be expected to do anything but maximize profit, using every advantage available to them within the limitations of our legal framework. But if our government continues to trend towards oligopoly — therefore diluting its incentive to regulate — businesses will do the same.
Anita's Angle: Where is the competition?
