Markets and competition

Economists see inverse relationship between government regulations and ‘market competition’

Economists see an inverse relationship between government regulations and ‘market competition’ — an idea that is taken at face value in policy circles and used to justify the elimination of all forms of ‘intervention’ in markets. The only problem: it is patently false.

In a hypothetical situation where ‘government intervention’ is entirely eliminated from a particular market, levels of competition will assume the shape of an inverted U-shaped graph when plotted against time: initially rising, stagnating after a certain point, and ultimately falling. This is because certain players will inexorably ‘win’ individual battles (or games) against competitors, which will mean a few things. One, the worst performers will be eliminated. Two, bad performers will find it increasingly difficult to ‘catch up’ as their more successful counterparts obtain the financial leverage to collude with one another and temporarily drive down prices to levels that are simply impossible for them to match. Three, good performers will use this period to reinvest their recently improved profitability to expand capacity, streamline operations, and introduce innovations for further efficiency via research and development — benefitting from economies of scale. Over time, those in the ‘lead’ will begin to form synergistic relations with one another — sometimes merging to form conglomerates, other times being acquired by bigger ones. Oligopolies will gradually tend towards monopoly as barriers to entry inevitably grow. This is a virtual certainty in the hypothetical scenario — not a bug, but a fundamental feature of the capitalist system. One real life contemporary example: X, formerly Twitter, currently has zero competitors despite all hullabaloo about the internet being the most decentralised space in the world. Coincidence? Hardly.

When markets begin heading towards monopolistic conditions, a well-functioning state steps in to protect consumer interests. This can happen in two ways. One, antitrust legislation that allows for company owners to be taken to court for deliberately driving down competition. Two, a government agency takes proactive measures to prevent planned mergers/acquisitions, prohibit price-fixing behaviour, obstruct collusive practices, and ensure that big players are not abusing their positions to the detriment of society’s welfare. In countries like Pakistan, however, this is a difficult task because the larger the firms get, the more lobbying power they attain — which they then use to tap into the vast network of patronage politics and bribe officials to avoid scrutiny. A case in point is the domestic industrial sector, rife with rent-seeking. Secondly, a lack of democratic norms at the broadest level means that officials housed within government agencies are simply far too incompetent to conduct careful market research/analysis to ascertain when certain players are beginning to adversely impact competitive dynamics, let alone identify the most effective redressal mechanisms.

In order to promote commercial activity, simply ‘getting out of the way’ is insufficient; a short-term strategy that functions to cripple state capacity over time. A polity that exists purely to serve private businesses is bound to face increasing levels of inequality, generalised frustration, and — if left unchecked — the potential for massive levels of instability and even violence. At some point or the other, a collective rejection of ‘trickle-down’ economics must take place: capital and labour do not have the same interests. If anything, their objectives are diametrically opposed to one another — with the former attempting to maximise profits and the latter looking to increase wages, both of which cannot simultaneously happen. A real life example of a country that takes this idea seriously is China which recently initiated a crackdown on Alibaba and its founder Jack Ma, eventually compelling the e-commerce giant to split into six standalone units with separate boards of directors.

Rather than mindlessly regurgitating outmoded neoclassical theory, Pakistan’s policymakers would do well to approach economics as a domain with competing interests — each of which must be granted equal importance.

Published in The Express Tribune, December 23^rd, 2023.

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