Tuesday, April 26, 2016

The Real Meaning of Competition

By Peter Klein

The aviation world has been all atwitter about the prospect that Virgin America, the US-based subsidiary of Richard Branson’s Virgin Empire is up for sale. Reportedly, Jet Blue — another smaller American carrier — is in the lead as a possible acquirer for Virgin America.[*] The big American carriers, Delta, United, and American Airlines supposedly are out of the running. This is because the US Justice Department, the Federal Trade Commission, Federal Aviation Administration, and other government agencies responsible for maintaining competition in the airline industry, would not allow them to acquire Virgin America.

Partly this is based on an incorrect understanding of what competition means. According to mainstream economists and government regulators, competition is determined by the number of firms in a particular industry. Because we have only three of the legacy carriers left, Delta, American, and United, each having acquired other former American carriers, it’s argued that that industry is not sufficiently competitive. We need other airlines like Southwest, Jet Blue, Virgin, and Alaska to remain in the industry so that we have an appropriate amount of competition. Allowing say Delta or American to acquire Virgin would lead to a reduction in competition in the airline industry.

Now, this idea is sort of understandable. The motive behind this understanding of competition or this approach to competition is to try to provide consumers with lower prices and better service. Moreover, many people believe — and certainly government agencies argue — that having just a few firms in the industry would mean higher prices and worse service for the customer. But, this is the wrong way to think about competition.

All We Need for Competition Is a Lack of Government Regulation

What does competition mean in ordinary language? It means competitors, two, three, four, or hundreds striving to provide, to do better than their rivals. In the case of business, this refers to firms that are striving to offer better products and services to consumers at better prices to earn higher profits by satisfying more consumers. All we need to have competition in an industry is the absence of government restrictions on entry into those industries. We don’t need anti-trust commissions; we don’t need government regulators to track the number of firms, to say well, it’s okay to have five firms in this industry, but it’s not okay to have four. Rather, government should allow entrepreneurs to experiment with different business models, with different kinds of businesses in attempts to offer goods and services that consumers want.

Take aviation, for example. We did have some deregulation of airline prices in the late 1970s, but the airline industry is not competitive in the sense that I’m describing it because airline landing slots are controlled by state, local, and — in some cases — federal government. So, an entrepreneur is not free to enter the aviation industry because this entrepreneur would not be able to get access to landing slots, to air traffic control services, and other complementary inputs that are controlled by governments.

A better example of real competition could be in the hotel and taxi industries. So, the government attempts to restrict entrepreneurs from entering the taxi industry by tightly controlling licenses that are granted to taxi operators, but entrepreneurs have figured out a way around this artificial restriction. For example, by setting up ride sharing services like Uber and room sharing services like Airbnb.

So, even though entry into the taxi business, narrowly defined, is restricted by licensing, entry into the business of providing rides or providing rooms is so far, not completely regulated by government. Of course, the taxi industry and the hotel industry are lobbying like crazy to keep Airbnb and Uber out of their markets, but the rise of the sharing economy provides a great example of how entrepreneurs when allowed to experiment, to introduce new products and services, to create new firms, can in fact provide services that consumers want and can provide true competition for the incumbents. Again, we want markets to be competitive. What does that require? It requires government regulators to get out of the way and not to protect privileged incumbents. It does not require commissions, committees, expert bodies, and other agencies to examine the market to count the number of firms, to make sure that the market is “competitive” according to their standards. All that is required is for the government to get out of the way and let entrepreneurs do what they do best.

[* Alaska Airlines subsequently made the winning bid.]

The above originally appeared at Mises.org.

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