Today I would like to correct one mistake about economy that is cited quite often. It is what I call "too much competition" fallacy. The argument runs that the competition is driving prices too low and is thus preventing companies from innovating and creating new technology and is thus hindering growth. The latest sighting I have of this monster is talking about broadband market in Finland.
The argument runs that the companies are competing so hard that they don't have enough money to spend on new technology and thus too much competition hinders growth.
What those who argue do not see is that research and new technology are an investment. An investment is only good, if it produces more than it costs. Thus, no matter hard competition, investments that are profitable will be made. Investments that are not profitable should not be made in any case.
So is there anything that changes? Can a hard competition make some new technologies unprofitable? The only case where it could, is if the new technology had great one time costs and could be easily, fast, and cheaply copied elsewhere. Technological knowledge has these qualities; so might this not mean that competition in fact stifles technological innovation?
Not necessarily. In our current world, patents exist to artificially make it more expensive for others to apply the knowledge you have created. In addition, the company that creates the new knowledge will be the first to market and will enjoy a monopoly power for a short while (which enables it to charge more from those customers that really want the new tech and get the investment costs back).
In addition, hard competition gives those companies the necessary incentives to do things as efficiently as possible. Many people forget that inventivess in business logic and company internal logistics/operations is an important part of what makes a company a success.
Lastly, is it really so that this particular company is the one who should do the innovating and research? Perhaps, for example, broadband companies should leave much of the technological and scientific research to others and concentrate on buying the technology they need from others. On the other hand, they could push for business innovations - new ways of doing old things, or ways of doing new things that customers want. Perhaps in cooperation with some of their more technologically oriented providers.
Thus, competition is not bad for technological innovation and progress. Instead it gives consumers more money to spend on things they want.
The fallacy comes from not understanding why companies spend money on research and new technology.
Friday: New Home Sales
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