5 Reasons Markets Are More About Coordination Than Competition

This article gives 5 reasons that markets are better described as systems of social coordination instead of systems of competition.

  1. Monopoly markets exist.
    1. If there’s a monopoly there isn’t any competition.
    2. Some may argue that monopolistic markets are inefficient but that isn’t always true. Granted, it’s far easier for these markets to break down but they don’t have to.
    3. Monopoly profits can incentivize innovation and product differentiation.
    4. Price-discriminating monopolies can maximize to social surplus; don’t forget that the individuals working at a monopoly are also people!
    5. Cournot competition is a somewhat related thing where we have oligopolies behaving
  2. Agglomeration effects are generally larger than competitive effects.
    1. Consider that you want a new job in your field of choice.
    2. The logic of competition says that you should go where you have few competitors.
    3. In the real world, you should go where many others in your line of work also exist.
    4. That’s because of the gains from agglomeration, or gains from geographic concentration, generally dominate competitive effects.
  3. Often, firms helping other firms in the same industry has a cost which is smaller than it’s benefit.
    1. Like casinos helping other casinos maintain a list of crook gamblers which shouldn’t be let in.That’s not competition is it?
  4. Firms in an industry can gain from coordinating.
    1. Gains from industrial reputation.
    2. Gains from scale when firms cooperate.
    3. Gains from consumer taste when firms coordinate to create industrial standards.
    4. Gains from information through development of best practices.
    5. There’s also an effect which may be included above or it may be something different, which I can describe by giving a scenario.
      1. Consider are a second-rate firm in a market which can’t afford to engage in marketing activities.
      2. Maybe it’s a local pizza joint with one location in a small town.
      3. Consider the best-in-class firm doesn’t have a location in the same small town as the second-rate firm.
      4. Residents have demand for the best-in-class supplier and they are willing to substitute consumption of the second-rate firm.
      5. The second-rate firm “gains by association.”
      6. Perhaps because the best-in-class supplier may be marketing in the area even if they don’t have a location due to deals with large TV, radio, and online marketing agencies.
  5. In some sense the idea of a competition in a win-win game is incoherent.
    1. Markets can be seen as a win-win game. That is, transactions or other activities inside of some market often constitute moves in a win-win game.
    2. In the normal sense of competition, agents are trying to win. If both agents win, was there any competition?
      1. Suppose firm A in a market alone makes $5 of profit, but if firm B enters the market then firm B will earn $10 of profit and firm A will earn $9 of profit.There would be no winner, loser, or competition in the traditional sense of the term in the scenario above, but there would be activity which can be described as coordination
      2. We can still perhaps construct a strange idea of “economic competition” which is robust to these issues, but maybe we should just call a spade a spade: Competition is not necessary in a market.

The existence of gains from trade which exceed the costs of trade is the only necessary condition for trade to take place, and wherever trade occurs we have defined a market. I would identify that activity at the social level as trade or more broadly as coordination which includes non-trade market activities. Competition is only an occasional subset of that activity.

  •  
  •  
  •  
  •  

Leave a Comment