COMPETITION. — In essence, this is the convergence, on the same market and at the same moment, of the individual plans (drawn up by natural persons or firms) to sell or purchase the same commodity or service; for competition to be effective, in the case of selling, it is required that none of the economic operators be able to decisively influence the formation of the price prevailing on the (equilibrium) market through its own supply; and the same applies to demand.
Normally, it is more likely that, for many products, competition will cease to operate on the supply side than on the demand side, giving rise to oligopoly, which is a weakened form of competition, and, in the extreme case, to monopoly. On the demand side, competition arises from the simple fact that a given good is relatively insufficient in relation to an excess demand; whereas, on the supply side, it is rooted in the need for firms to expand the sale of their products in order to profit from the cost reductions associated with large-scale production, when it is not intended to achieve, through the elimination of other firms, the profitable position of the monopolist.
The tactics of the so-called struggle for competition consist chiefly in raising or lowering the purchase or selling price, respectively, thereby producing a corresponding advantage for the seller or the buyers.
In the case of competition among sellers, a compression of the selling price and of production costs themselves takes place, with the exclusion from the market of firms producing under particularly burdensome conditions; thus it is usually asserted that free competition benefits consumers, by making products available to them at the lowest prices, and also the economy as a whole, insofar as it stimulates producers to achieve the lowest costs, that is, the most economical conditions of production. Nevertheless, the benefits of free competition may disappear if it is not fully realized; while, in certain situations, they give way to genuine disadvantages, especially of a social nature.
Free competition among sellers may be absent when they succeed, especially through advertising, in differentiating their product, even if only psychologically, so as to gain a kind of monopoly, unstable but sufficient to exploit consumers to some extent; but, much more importantly, it may be systematically restricted when firms enter into special agreements among themselves to fix a minimum price below which they will not sell (a collective monopoly agreement, or cartel). This agreement may mark a deviation of the free market toward monopolistic forms, all the more effective the more comprehensive the cartel is, that is, the smaller the group of firms capable of pursuing a different sales policy, with evident repercussions on the market.
There is, however, a limit to the action of the cartel, inherent in this organization itself: it is the interest of firms burdened with higher fixed costs in expanding production and sales by lowering prices, since their production costs increase, as production expands, according to a slower progression, thus allowing the possibility of greater overall profits. Nevertheless, competition ends up suffering significant restrictions, such as those implemented by cartels, whenever changes in the intensity and direction of demand prevent firms, whether efficient or not, from adequately amortizing the cost of fixed capital, which continually increases as production becomes more mechanized and specialized. Indeed, if the market, on the buyers’ side, is too changeable in relation to the slowness with which the modern firm adapts to quantitatively and qualitatively altered demand, it is understandable that firms should be tempted to keep prices artificially high, when, if left free, they would fall to the point of preventing the recovery, within a sufficiently short period, of the cost of productive equipment that cannot be used for other production, at least without high conversion costs. This essential fact, technical and economic at the same time, which from another angle may be regarded as the problem of unsold inventories, insofar as it results from each firm’s systematic ignorance of the production and sales plans of the other similar firms, is perhaps not sufficiently taken into account by those who regard free competition as invariably and supremely beneficial. It must indeed not be forgotten that competition is advantageous to the consumer in the form of an offer of goods of progressively better quality and at a tendentially lower price; but that it is not easy to prevent it, precisely when it becomes excessive, from turning into quasi-monopoly (through coalitions of firms), thereby shifting onto consumers the cost of keeping less efficient firms alive; and, still more, that the absolute freedom of initiative of competing firms is not infrequently costly in terms of the stability of the economic system, that is, of the security of the income received by those same consumers, who are also producers (participants in production) for a market whose fortunes affect them.
There is a theory, namely that of Röpke, according to which the State should adopt an economic policy intended to restore fluidity to the productive organization and to the market whenever free competition threatens to lose a substantial degree of efficiency and the danger of monopolistic situations arises—situations harmful to consumers and uneconomic because the economy of production is not subjected to the control of a market free in its assessments. In practice, however, the obstacles to implementing a policy of assisting firms so that they may continually and rapidly readjust their programs and facilities in response to changes in demand, thereby avoiding the temptation of a cartel solution and enabling themselves to remain continuously exposed to competition, are so formidable that States usually limit themselves to assisting, especially when extra-economic motives intervene, certain firms that are having greater difficulty than others in adapting to the new market situation, reserving the bulk of the means of intervention for correcting the economic cycle; and economic fluctuations are also found in an environment where competition among firms is complete, although it cannot be denied that certain situations of depression may be intensified when the spread of cartel formations has reduced the operation of competition in fundamental sectors such as that of raw materials.
In the particular case of competition among retail sellers, there is frequently a tendency for prices to rise rather than fall when the excessive multiplication of firms (the plurality of firms being one of the characteristics of free competition) leads to such a fragmentation of the existing clientele that each firm can cover its fixed costs with a limited volume of sales and is therefore forced to charge prices higher than those it could have charged if the competing firms had been fewer.
But the radical objection to the acceptability of a totalitarian system of free competition lies in the ethical and economic impossibility, at one and the same time, of rigidly subordinating human labor, and in general the demographic element of the complex socio-economic organism, to the demands of such a system. The ethical impossibility is stressed both in Rerum novarum and in Quadragesimo anno, where Pius XI speaks of “that unrestrained freedom of competition which allows only the strongest to survive, that is, often, the most violent in the struggle and the least heedful of conscience” (encyclical Quadragesimo anno, of 15 May 1931, in AAS, 23 [1931], p. 211).
“It is necessary,” the Pontiff adds, “that free competition, confined within reasonable and just limits, and even more that economic power, should in fact be subject to public authority, insofar as this concerns the latter’s office” (ibid., p. 212).
wirtschaftlicher Leistungsteigerung und Leistungsanalyse, Berlin 1942; E. H. Chamberlin, The theory of monopolistic competition, Cambridge (Mass.) 1947; F. Vito, Il prezzo e la distribuzione, Milan 1948; id., Economia e personalismo, there 1940. Franco Feroldi