4 Benefits of Competition & 1 Major Threat

Everyone likes to win. However, one thing all winners understand is that by competing against those who are better than you, your game improves. It is universally acknowledged, from the classroom, to the playing field, to the marketplace, healthy competition tends to make things better for everyone.

How Does Competition Make Us Better?

Competition spurs innovation. Though we long for blue ocean markets, it is the crowded market that forces businesses to differentiate themselves by not doing what everyone else does or by simply doing it better.

Competition jolts us out of complacency. Where companies are striving to be innovative, employees are encouraged, if not forced, to come up with new ideas and better solutions. The cliché “If you snooze, you lose” is the innovator’s mantra.

Competition drives learning. Competitors are students of themselves and the opposition. As the philosopher general Sun Tzu said, “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

Competition inspires customer service. Most companies are competing against other companies offering a similar product. Therefore, we are forced to compete for customers by making their experience, not the cost of our product, the main thing.

Protecting the Competitive Balance

Since Adam Smith, we have understood in a competitive economy the pursuit of private interests leads to the best outcomes for all.* The asterisk* is for the important factor of “in a competitive economy.”

Spirited competition forces businesses to strive to lower their prices and improve the quality of their products and services. Competition forces companies to reduce their own costs and run their businesses as efficiently as possible to maintain their edge.

But what happens when competition is restricted? What is the outcome when one company or a group of companies acquires most of its competitors or reaches agreements on prices with other competitors? Prices are likely to increase and quality is also likely to suffer.

This is why anti-trust laws were passed over a century ago. Today, some thought leaders are raising similar questions about Big Tech, the handful of companies that control the internet and social media. According to Jonathan Haskel and Stian Weslake in Capitalism without Capital, this economy is dominated by intangible assets like research and development, marketing and software — commodities that defy traditional regulatory controls.

New World, New Rules

Google now controls 86 percent of the search engine market in the United States. If you combine it with the next runner up, it climbs to 93 percent and with the top four, 99 percent. Expressing the concern many have felt, but few understood, University of Chicago professor Luigi Zingales wrote in Imprimis, “Not only does this data concentration represent an insurmountable barrier for new entrants into the market, it also represents a threat to individual privacy and can even be a threat — as recent data mining and censorship scandals suggest — to the functioning of democracy.” In fact, Zingales describes de-ranking as “a subtle form of censorship.”

He goes on to say, “Google and Facebook know more about us than our spouses or closest friends — and sometimes even more than we know about ourselves. They predict what we’re going to do, how we’re going to vote and what products we’re going to buy.” Then he identified the real specter: “Do we want to risk having these private monopolies grant information about us to the government in exchange for protection of their monopoly power?”

We realize this all may sound rather Orwellian, but it is often by recognizing an existential threat that we avoid the dire consequences that can follow.