Competition

COMPETITION. - It is, substantially, the convergence upon the same market and at the same moment of individual plans (drawn up by natural persons or by firms) of sale or purchase, with reference to the same goods or performance of service; for competition to be effective, in the case of sale, it is required that none of the economic operators be in a position to decisively influence the formation of the price existing on the market (of equilibrium) by means of its own supply; and likewise for demand.

Normally, it is more likely that for many products competition will fail on the supply side than on the demand side, giving rise to oligopoly, which is a weakened form of competition and, in an extreme situation, to monopoly. On the demand side, competition arises from the simple fact of the relative insufficiency of a given good with respect to an excess demand; whereas, on the supply side, it is rooted in the necessity for firms to expand the sale of products in order to profit from the cost reductions connected with large-scale production, when it does not answer to the intent of reaching, through the elimination of the other firms, the profitable position of the monopolist.

The tactic of so-called competition struggle consists mainly in raising or reducing the price, respectively of purchase or of sale, thereby producing a corresponding advantage for the seller or for the buyers.

In the case of competition among sellers, a compression of the sale price and of the production costs themselves is brought about, with the exclusion from the market of firms that produce under particularly burdensome conditions; so that it is usually asserted that free competition benefits consumers, to whom it brings products at minimum prices, and also the entire economy, inasmuch as it stimulates producers to achieve the lowest costs, that is, the most economical conditions of production. However, the benefits of free competition may fail if it is not fully realized; while they give way to genuine disadvantages, especially of a social order, in certain situations.

Free competition among sellers may fail when they succeed, especially through advertising, in differentiating their product even only psychologically, so as to take advantage of a kind of monopoly, unstable but sufficient to exploit consumers to some degree; but, a far more important fact, it may be systematically restricted when firms enter into specific agreements among themselves for the fixing of a minimum price below which they will not sell (collective monopoly agreement, 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 more reduced the ranks of the firms that are in a position to carry out a different sales policy, with visible repercussions on the market.

There is, however, a limit to the action of the cartel, congenital to this very organization, and it is the interest of the firms more burdened with fixed costs to expand production and sales through a reduction of prices, given that their production costs grow, as production expands, according to a slower progression, with the possibility therefore of greater overall gains. Nevertheless, competition ends up suffering significant limitations, such as that brought about by cartels, every time that changes in the intensity and direction of demand prevent firms, efficient or not, from adequately amortizing the cost of fixed capital, which increases continuously with the growing mechanization and specialization of production. In fact, if the market, on the buyers' side, is too changeable in relation to the slowness of adaptation of the modern firm to a quantitatively and qualitatively varied demand, one understands how firms are induced to keep prices artificially high, when these, left free, would fall to the point of preventing the recovery, within a suitably rapid interval, of the cost of the productive equipment that cannot be devoted to other productions, at least without high costs of conversion. This essential fact, technical and economic at the same time, which on another side can be considered as the problem of unsold inventories, inasmuch as it is the effect of a systematic ignorance, on the part of each firm, of the production and marketing plans of the other similar firms, is perhaps not sufficiently kept in mind by those who regard free competition as in every case supremely beneficial. Indeed, one must not forget that competition is advantageous to the consumer, in the form of an offer of goods of progressively better quality and at a price tending to be lower; but that it is not easy to prevent it, precisely when it is exasperated, from turning into quasi-monopoly (through coalitions of firms), thus shifting onto consumers the cost of keeping alive less efficient firms; and even more that the absolute freedom of initiative of firms competing among themselves is not infrequently costly in terms of the stability of the economic system, that is, of the security of the income received by the consumers themselves, who are also producers (collaborators in production) for a market to whose fortunes they are bound.

There is a theory, 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 every time that free competition threatens to lose seriously in efficiency and the danger of monopolistic situations looms, harmful to consumers and uneconomic, because the economy of production does not undergo the control of a free market in its valuations. But, in practice, the obstacles to realizing a policy of aid to firms so that they continuously and rapidly readjust their programs and their plants, in correspondence with the changing of demand, so that they may not be tempted by the cartel solution and may be able to expose themselves uninterruptedly to competition, are of such magnitude that States usually limit themselves to coming to the aid, especially if extra-economic motives intervene, of certain firms that more than others are in difficulty in bringing themselves into accord with the new market situation, reserving the bulk of the means of intervention for the correction of the economic cycle; and economic fluctuations are found also in an environment where competition among firms is integral, although it cannot be denied that certain situations of depression may also be accentuated, when the spread of cartel formations has reduced the functioning of competition in fundamental sectors such as that of raw materials.

In the particular case of competition among retail sellers, there is frequently observed a tendency of the price to rise, rather than to fall, when the excessive multiplication of firms (the plurality of firms is one of the characteristics of free competition) leads to such a fragmentation of the existing clientele that each firm can meet its fixed costs with a limited volume of sales and is therefore forced to practice prices higher than those it could have practiced if the competing firms had been fewer in number.

But the radical objection to the acceptability of a totalitarian system of free competition lies in the impossibility, ethical and economic at the same time, of rigidly subordinating human labor, and in general the demographic element of the complex economic-social organism, to the requirements of such a system. The ethical impossibility is emphasized both in Rerum novarum and in Quadragesimo anno, where Pius XI speaks "of that unbridled freedom of competition, which allows only the strongest to survive, that is, often, the most violent in the struggle and the least mindful of conscience" (encyclical Quadragesimo anno, of May 15, 1931, in AAS, 23 [1931], p. 211).

"It is necessary," adds the Pontiff, "that free competition, confined within reasonable and just limits, and even more that economic power be in fact subject to the public authority, in what concerns the office of the latter" (ibid., p. 212).

Franco Feroldi