What is good and what is bad: is competition good?
The next cross post from my main blog ...
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The current generation of Russians has already grown up with the belief that the market successfully regulates supply and demand, thereby forcing producers to produce what consumers need, as well as the fact that competition is a vital factor in this process. In the sense that a monopolist can sell everything that comes to his head at any price, and if a dozen companies struggle in the market with about the same product, they will buy cheaper with better features and the consumer will benefit. Is it true?
Well, about the monopolies in the service I am not supposed to speak out. I think it's clear why. At this, lawyers have to touch sensitive topics. Although if you talk to serious economists, the question of whether monopolies are bad or not so trivial as they seem good. I myself grew up with the Soviet Union, a monopoly state, and during the period of perestroika and the crushing victory of democracy, I personally did not think that life had become better. In any case, we turn to the competition.
So is competition a good thing? Take your time with the answer. First, imagine that you are the president of a Pepsi-Cola corporation. Dreaming is not bad, right? So, you have, say, one hundred million dollars to bypass the Coca-Cola producers in competition. For reference, these two firms do control virtually the entire US soft drink market. Your vice-presidents have long thought and came out with three sentences:
')
So, as president of the firm, which option will you choose? When answering, consider the following:
And if the previous president has already released a cola with a sweetener? The answer is, alas, obvious.
The moral of this tale is simple - not all competition serves the interests of the user. And what are the types of competition?
This is the reason why it was broken into its component parts Standard Oil. Note that it was at the beginning of the twentieth century, when the whole world and the United States were in a different economic structure, called capitalism. In the modern economy, the following changes occur in the market where price competition takes place:
To be honest, you need to note one case where a consumer wins - it is commodity-based products, that is, products that are purely unified, simple as a cork, and goods from one manufacturer are not really different from goods from another manufacturer. This was exactly the gasoline market when Standard Oil broke. Of course, all the processes described above all the same took place, but the service and features for the consumer do not matter if the gasoline got into the tank of his car.
Competition in price and commoditization of the market is one of the major nightmares of top management in any industry. On the commodity market, the emergence of small competitors and the existence of small players in general is impossible. A commodity market is a barrel with rats on a ship in which the “rat king” is displayed. Firms on it merge until there is one who has eaten all the rest. Antitrust laws are just an artificial limiter that does not allow the last two “rat kings” to eat each other, but start-ups in this barrel, that is, the market, are not worth while. Sogrut-s. By the way, the introduction of competition in price is exactly the reason for which antitrust laws were introduced in the United States and Europe. As they say, for what they fought, for that and ...
In general, if the market is healthy, then at some point the competition for the price comes a moment when it is no longer possible to lower the price. At this point, the market is in a sad state, when firms cannot make money on it, and consumers cannot get a product or service that would satisfy them.
Sometimes, it even leads to a completely new market with the same products, but at a different level of quality. For example, you can go to the nearest store and buy there relatively cheap pork with high acidity, eggs laid in hens in cages, and fruits and berries, treated with herbicides, fungicides and insecticides, and you can go to some Whole Foods or Wild Oats, and buy there everything is certified organic and from animals grazing in the field. Such a new market hangs over the main like a hovercraft and, in fact, is still the price market. In addition, as shown by the recent scandal in California over the industry of "organic" products, it still does not guarantee the quality, which is the only reason for its existence.
Well, and whether the consumer has benefited from this - judge for yourself. The consolation is that somewhere between a service center in India and a cell phone that does not work, there comes a moment when the market changes and becomes a competition market in terms of functionality and level of service. By the way, now with my cell phones in the USA, according to my personal observations, we are just somewhere there, with service centers already partly in India, but the phones are still working. Now, as in that joke about the great commanders of our time - we are waiting, “until winter comes ...”
Sometimes it happens that one of the market players with competition for price manages to find something new, revolutionary, such that its offer starts to stand out sharply from any other offers. At this moment, the market goes into a state of competition in terms of functionality and service, and often it just means creating a new market.
For example, now Apple is trying to do just that in the cell phone market. Back in the late 90s, I wrote that cell phones and handhelds would inevitably merge into one device, which Apple did, draining a cell phone, handheld, camera, MP3 player, video player in one device, connecting it with unlimited Internet and great design. Still DRM from there would be thrown out on figs, I could and would be tempted. Although, perhaps, I will wait until the cellular service for him will settle down a bit on the market with price competition ... Still, an excellent device is not a reason to push up the price of the commodity service attached to this device.
When such a breakthrough occurs it is very important that, strangely enough, this new player turns out to be a monopolist for a while. Remove this factor and competitors will instantly make tracing of the invention and return the market to a state of competition for the price, with a sad result already known. Worse, in this case, the fact that the price of innovation is not justified, and therefore none of the players in the price market without the protection of innovation will simply not try. Remember the option to invest 20 million in a new soft drink at the beginning of this article?
The fact that one of the players becomes a monopolist and has the ability to hold a higher price, as the charge premium is called here, leads to the fact that on the one hand it has money for innovation, and on the other hand, the other players are also forced that something to invent. As a result, if it is possible, different offers are on the market, and those that find their consumers survive.
In today's market competition in functionality and service is the only type of competition. where the consumer really wins. I myself am a big fan of markets with price competition, but at the same time I perfectly understand that without markets with competition in functionality and people who buy in these markets, I would still be sitting with bills and an abacus, instead of 64-bit dual core computer. And the question of a free operating system would not stand for me, my elite computer would be scores with ivory knuckles.
Unfortunately, competition in terms of functionality and service is very difficult and very expensive. Sometimes it takes more than one year - the mobile phone industry has evolved from simple phones to iPhones for almost ten years. Other features are revolutionary only in the fevered imagination of their creators (and those who write them an annual review). Sometimes the company simply does not know how to promote and hear people who are able to create such features. It is sometimes easier to replace one harmful substance in lemonade with another, as in the example at the beginning of this article. And then the consumer is faced with ...
When the competition for the price has already gone nowhere, and the new functionality or service that the consumer would not need to invent, the competition for marketing and a share in the consumer’s mind begins. When antimonopoly laws were passed, this was not really. That is, it was, but did not even come close to what we have now. The book Positioning: The Battle for Your Mind has not been written yet. Branding for the majority still meant the process of burning the host's name on cattle skins with a hot iron.
Strictly speaking, this type should be called a competition in delivery, which includes the delivery of the product image to the consumer’s mind, the determination of its choice, the delivery of the offer to the place where the consumer makes a purchase, which is often associated with the delivery of a physical product to some node where the purchase takes place . In a sense, this is the reverse overhead competition, in which the one who spends more on advertising and expenses on the availability of goods in your rural store wins.
I did not separate competition for a place on the shelf from competition for a share in the mind because these two types of competition exist simultaneously and represent the third type of market - saturated.
Let's start with the competition for shelf space in the store, as more simple. It is estimated that 50 varieties of sausage in the store is an advantage for the consumer. However, 50 varieties of sausage from the company A, 50 varieties of sausage from the company B, and 50 varieties of sausage from the company C occupy about 50 times more space on the shelf than the doctor's, special and liver in the Soviet shop of the 70s. And they eat them at the same speed, that is, each of them is sold 50 times less. That is, when you bought the sausage, the cost of storing it on the shelf, including the cost of not bought, spoiled and discarded, the cost of electricity for the refrigerator, the cost of rent for the room, the cost of the workers who hung up the sausage, it's all 50 times more than when the store only 3 varieties of sausage. For the choice you have to pay. And even if you do not need this choice. The one who walks for half an hour to the right and left, choosing sausage to taste, and the one who habitually grabs from the shelf the only variety that he eats, pays exactly the same share for the fact that the varieties that they did not buy were on the shelves. How do you like it? I, as a consumer, have undoubtedly benefited greatly from this implicit tax (if someone does not understand, this is sarcasm), caused by competition, and by no means a monopoly.
But that is not all. The next is better. Competition for shelf space makes retail stores very picky, which is understandable. The result is that if you do not have sales, then you can not get a place on the shelves. But without space on the shelves, you do not get the popularity, without which real sales are impossible. The result is a vicious circle from which starting a business is very, very difficult to break out. Have you ever tried to attach a newly published book to at least one of the networks of retail bookstores in America like Barnes & Noble, where I now sit in a cafe? With competition, the market is actually closed to small and start-up businesses. Of course, if you do not have, as they say in America, business ties, or as the USSR simply said "ties" or "cronyism." Here is such an interesting result of competition.
Now about a much more interesting part - competition for a share in the mind. The cost that a consumer pays for space on the shelves grows with the number of producers; for an astronomical increase in the cost of advertising costs, it’s quite enough just two manufacturers who are trying to overtake each other in consumer preferences. Do you know how much TV advertising costs, especially on “prime time”? Competition for a share in the mind, which is naturally limited, leads to competition in increasing the overhead of advertising. Moreover, these are not just bids against each other as in an auction, the mechanism of the impact of advertising on consumers in modern society is reminiscent of the effect of a drug on the brain and require a constant increase in dose, but this is a separate topic for which I have a separate article (“Society on drugs: are we addicted to advertising? ”) The essence remains the same - in order to sell you one sort of sausage instead of another, which is no different from it, firms spend huge amounts of money. And what brand you bought in the end, the money in the price tag of your purchase.
On the other hand, you can enter the position of businesses. And what should they do? In terms of price competition, it is impossible to survive, new features cannot be invented - what features are there in the sausage? They have to compete for you and spend money on this competition. As a result, the item for five cents is worth five dollars in the auto parts store.
Well, how do you get such consumer benefits from competition?
-
The current generation of Russians has already grown up with the belief that the market successfully regulates supply and demand, thereby forcing producers to produce what consumers need, as well as the fact that competition is a vital factor in this process. In the sense that a monopolist can sell everything that comes to his head at any price, and if a dozen companies struggle in the market with about the same product, they will buy cheaper with better features and the consumer will benefit. Is it true?
Well, about the monopolies in the service I am not supposed to speak out. I think it's clear why. At this, lawyers have to touch sensitive topics. Although if you talk to serious economists, the question of whether monopolies are bad or not so trivial as they seem good. I myself grew up with the Soviet Union, a monopoly state, and during the period of perestroika and the crushing victory of democracy, I personally did not think that life had become better. In any case, we turn to the competition.
So is competition a good thing? Take your time with the answer. First, imagine that you are the president of a Pepsi-Cola corporation. Dreaming is not bad, right? So, you have, say, one hundred million dollars to bypass the Coca-Cola producers in competition. For reference, these two firms do control virtually the entire US soft drink market. Your vice-presidents have long thought and came out with three sentences:
- To invest all one hundred million in television advertising where groups of young idiots dance, kiss, have fun and drink Pepsi-Cola under the slogan "The new generation chooses Pepsi!"
- Replace the diabetes-causing cereal fructose syrup (High Fructose Corn Sirup) with a potentially carcinogenic sugar substitute and offer the result as a dietary alternative.
- To invest twenty to thirty million in the creation of a completely new and healthy drink (a research project, without a guarantee of success), and the rest of the money in the promotion of this drink, if you manage to create it.
')
So, as president of the firm, which option will you choose? When answering, consider the following:
- Your activity as president of the company will be judged by the behavior of the company's shares in the stock market this year.
- Your options - the right to buy stock at a fixed price - only make sense if the stock rises above that fixed price. And this is for you the difference in potentially several million.
- It is very likely that in three or four years they will eat you up on domestic policy or they will make you a good offer from another company that you can head ...
- ... if, of course, in these three or four years you will look like a good president who knows how to grow stocks.
And if the previous president has already released a cola with a sweetener? The answer is, alas, obvious.
The moral of this tale is simple - not all competition serves the interests of the user. And what are the types of competition?
Price competition
This is the reason why it was broken into its component parts Standard Oil. Note that it was at the beginning of the twentieth century, when the whole world and the United States were in a different economic structure, called capitalism. In the modern economy, the following changes occur in the market where price competition takes place:
- Commoditization of the offer occurs, the goods from one company are essentially no different from the goods from another company. Margins are falling, revenues are falling. The consumer initially believes that he won.
- Savings are becoming the leading criterion for the survival of a firm. Small firms merge and absorb large ones in order to minimize costs, all noncritical customer privileges are devoured to the bone, and the support service is transferred to India, which in general is equivalent to replacing it with an answering machine with the phrase “I don’t understand you, sir!”
- Firms that try to maintain the level of service at the expense of higher prices go bankrupt, the remaining firms are essentially monopolists with a nightmarish service, although the nightmarishness of the service is not a consequence of monopolism, but on the contrary, the monopolistic position is achieved due to the low cost of this service itself.
To be honest, you need to note one case where a consumer wins - it is commodity-based products, that is, products that are purely unified, simple as a cork, and goods from one manufacturer are not really different from goods from another manufacturer. This was exactly the gasoline market when Standard Oil broke. Of course, all the processes described above all the same took place, but the service and features for the consumer do not matter if the gasoline got into the tank of his car.
Competition in price and commoditization of the market is one of the major nightmares of top management in any industry. On the commodity market, the emergence of small competitors and the existence of small players in general is impossible. A commodity market is a barrel with rats on a ship in which the “rat king” is displayed. Firms on it merge until there is one who has eaten all the rest. Antitrust laws are just an artificial limiter that does not allow the last two “rat kings” to eat each other, but start-ups in this barrel, that is, the market, are not worth while. Sogrut-s. By the way, the introduction of competition in price is exactly the reason for which antitrust laws were introduced in the United States and Europe. As they say, for what they fought, for that and ...
In general, if the market is healthy, then at some point the competition for the price comes a moment when it is no longer possible to lower the price. At this point, the market is in a sad state, when firms cannot make money on it, and consumers cannot get a product or service that would satisfy them.
Sometimes, it even leads to a completely new market with the same products, but at a different level of quality. For example, you can go to the nearest store and buy there relatively cheap pork with high acidity, eggs laid in hens in cages, and fruits and berries, treated with herbicides, fungicides and insecticides, and you can go to some Whole Foods or Wild Oats, and buy there everything is certified organic and from animals grazing in the field. Such a new market hangs over the main like a hovercraft and, in fact, is still the price market. In addition, as shown by the recent scandal in California over the industry of "organic" products, it still does not guarantee the quality, which is the only reason for its existence.
Well, and whether the consumer has benefited from this - judge for yourself. The consolation is that somewhere between a service center in India and a cell phone that does not work, there comes a moment when the market changes and becomes a competition market in terms of functionality and level of service. By the way, now with my cell phones in the USA, according to my personal observations, we are just somewhere there, with service centers already partly in India, but the phones are still working. Now, as in that joke about the great commanders of our time - we are waiting, “until winter comes ...”
Competition in functionality and service
Sometimes it happens that one of the market players with competition for price manages to find something new, revolutionary, such that its offer starts to stand out sharply from any other offers. At this moment, the market goes into a state of competition in terms of functionality and service, and often it just means creating a new market.
For example, now Apple is trying to do just that in the cell phone market. Back in the late 90s, I wrote that cell phones and handhelds would inevitably merge into one device, which Apple did, draining a cell phone, handheld, camera, MP3 player, video player in one device, connecting it with unlimited Internet and great design. Still DRM from there would be thrown out on figs, I could and would be tempted. Although, perhaps, I will wait until the cellular service for him will settle down a bit on the market with price competition ... Still, an excellent device is not a reason to push up the price of the commodity service attached to this device.
When such a breakthrough occurs it is very important that, strangely enough, this new player turns out to be a monopolist for a while. Remove this factor and competitors will instantly make tracing of the invention and return the market to a state of competition for the price, with a sad result already known. Worse, in this case, the fact that the price of innovation is not justified, and therefore none of the players in the price market without the protection of innovation will simply not try. Remember the option to invest 20 million in a new soft drink at the beginning of this article?
The fact that one of the players becomes a monopolist and has the ability to hold a higher price, as the charge premium is called here, leads to the fact that on the one hand it has money for innovation, and on the other hand, the other players are also forced that something to invent. As a result, if it is possible, different offers are on the market, and those that find their consumers survive.
In today's market competition in functionality and service is the only type of competition. where the consumer really wins. I myself am a big fan of markets with price competition, but at the same time I perfectly understand that without markets with competition in functionality and people who buy in these markets, I would still be sitting with bills and an abacus, instead of 64-bit dual core computer. And the question of a free operating system would not stand for me, my elite computer would be scores with ivory knuckles.
Unfortunately, competition in terms of functionality and service is very difficult and very expensive. Sometimes it takes more than one year - the mobile phone industry has evolved from simple phones to iPhones for almost ten years. Other features are revolutionary only in the fevered imagination of their creators (and those who write them an annual review). Sometimes the company simply does not know how to promote and hear people who are able to create such features. It is sometimes easier to replace one harmful substance in lemonade with another, as in the example at the beginning of this article. And then the consumer is faced with ...
Competition in marketing and customer share (mind share)
When the competition for the price has already gone nowhere, and the new functionality or service that the consumer would not need to invent, the competition for marketing and a share in the consumer’s mind begins. When antimonopoly laws were passed, this was not really. That is, it was, but did not even come close to what we have now. The book Positioning: The Battle for Your Mind has not been written yet. Branding for the majority still meant the process of burning the host's name on cattle skins with a hot iron.
Strictly speaking, this type should be called a competition in delivery, which includes the delivery of the product image to the consumer’s mind, the determination of its choice, the delivery of the offer to the place where the consumer makes a purchase, which is often associated with the delivery of a physical product to some node where the purchase takes place . In a sense, this is the reverse overhead competition, in which the one who spends more on advertising and expenses on the availability of goods in your rural store wins.
I did not separate competition for a place on the shelf from competition for a share in the mind because these two types of competition exist simultaneously and represent the third type of market - saturated.
Let's start with the competition for shelf space in the store, as more simple. It is estimated that 50 varieties of sausage in the store is an advantage for the consumer. However, 50 varieties of sausage from the company A, 50 varieties of sausage from the company B, and 50 varieties of sausage from the company C occupy about 50 times more space on the shelf than the doctor's, special and liver in the Soviet shop of the 70s. And they eat them at the same speed, that is, each of them is sold 50 times less. That is, when you bought the sausage, the cost of storing it on the shelf, including the cost of not bought, spoiled and discarded, the cost of electricity for the refrigerator, the cost of rent for the room, the cost of the workers who hung up the sausage, it's all 50 times more than when the store only 3 varieties of sausage. For the choice you have to pay. And even if you do not need this choice. The one who walks for half an hour to the right and left, choosing sausage to taste, and the one who habitually grabs from the shelf the only variety that he eats, pays exactly the same share for the fact that the varieties that they did not buy were on the shelves. How do you like it? I, as a consumer, have undoubtedly benefited greatly from this implicit tax (if someone does not understand, this is sarcasm), caused by competition, and by no means a monopoly.
But that is not all. The next is better. Competition for shelf space makes retail stores very picky, which is understandable. The result is that if you do not have sales, then you can not get a place on the shelves. But without space on the shelves, you do not get the popularity, without which real sales are impossible. The result is a vicious circle from which starting a business is very, very difficult to break out. Have you ever tried to attach a newly published book to at least one of the networks of retail bookstores in America like Barnes & Noble, where I now sit in a cafe? With competition, the market is actually closed to small and start-up businesses. Of course, if you do not have, as they say in America, business ties, or as the USSR simply said "ties" or "cronyism." Here is such an interesting result of competition.
Now about a much more interesting part - competition for a share in the mind. The cost that a consumer pays for space on the shelves grows with the number of producers; for an astronomical increase in the cost of advertising costs, it’s quite enough just two manufacturers who are trying to overtake each other in consumer preferences. Do you know how much TV advertising costs, especially on “prime time”? Competition for a share in the mind, which is naturally limited, leads to competition in increasing the overhead of advertising. Moreover, these are not just bids against each other as in an auction, the mechanism of the impact of advertising on consumers in modern society is reminiscent of the effect of a drug on the brain and require a constant increase in dose, but this is a separate topic for which I have a separate article (“Society on drugs: are we addicted to advertising? ”) The essence remains the same - in order to sell you one sort of sausage instead of another, which is no different from it, firms spend huge amounts of money. And what brand you bought in the end, the money in the price tag of your purchase.
On the other hand, you can enter the position of businesses. And what should they do? In terms of price competition, it is impossible to survive, new features cannot be invented - what features are there in the sausage? They have to compete for you and spend money on this competition. As a result, the item for five cents is worth five dollars in the auto parts store.
Well, how do you get such consumer benefits from competition?
Source: https://habr.com/ru/post/13884/
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