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DIRECT COMPETITION

This is what your regular Perry and Maria “out-there” understand for competition. A product for a product. A classic example is cars of the same type (e.g. mini-van for mini-van). Lowest price usually wins. There is a gigantic “body of knowledge” (as scientists like to put it) written about it. What it is and what it is not. What it does, how it works, what is OK and what is not OK, how do we “manage” it, how do we “encourage” it… etc, etc, etc.

Of course, it is all nonsense. It is so because competition works at its best without any intervention, just as the free market does.

Furthermore, most academic economists spend time debating the characteristics and differences between “perfect” and “imperfect” direct competition. Don’t worry, we won’t waste your time. Those are purely academic topics that have absolutely no impact whatsoever in the real-world operation of markets… with one exception: intervention. This much is obvious. Politicians’ drones (aka “economic advisors”) need a theory sufficiently convoluted to justify politicians’ measures and actions that will ensure their masters’ job security with voters and by extension, their own. The tiny flaw in this scheme is that, as we have previously said countless times, the more they mess around with a free market, the worse it performs for all of us.

The lesson here is simple: if you hear a politician or an economist suggesting or recommending “measures” to be taken to foster “competition”, you can rest assured that from that point on, you will get worse goods and services. That much is a given.

The engine of direct competition, as with any other type of competition, is greed.

This is easy to understand. As human beings, we are lazy. And jealous. If a person has a product or service that is selling well, the shortest way to get money is to copy that very same product or service. It is there. It has been market-tested. It sells. It is known. Why risk time, effort and money in research, trial and error if the means to money is right in front of our noses?

And so, the shortest path to money is direct competition.

This is the reason why direct competition is so pervasive: because is the shortest path to profits.

The mechanism is also simple. If product A is selling at 10 Morlocks and I wish to sell product B which is almost identical to A, I will need to give buyers a reason to do so. This reason or motivation is a lower price. Yes, it is that simple.

Hence, direct competition lowers prices and increases product availability.

There really is no mystery here. Direct competition is well understood by regular people and not so much by academics (luckily enough, we don’t care about this latter bunch).

Direct competition is good, but left alone is even better!

 

SUBSTITUTE COMPETITION

This type of competition can be seen as “Plan B”. If for whatever reason a company cannot produce product O to compete directly against product P (that would be “Plan A”), they will switch to “Plan B”. This plan calls for the creation of product Z that will have some of the characteristics of product P, but not quite. A classic example is cars (e.g. compacts against standard 4 doors).

Again, the reasons for doing so are simple. They know that product P sells and it sells well. There is a market for it. What sells from product P, are certain characteristics. Hence, they manufacture product Z containing some of these characteristics (50%? 70%?) because they know that for some people that level of coincidence is enough.

They also understand that they cannot give people exactly what they want, but only a sufficiently good approximation. In order to compensate for this disappointment, they sell product Z at a lower price than P.

And again, there are rivers of ink written about this type of competition which we feel free to ignore since they don’t add anything meaningful to this lesson. Again, it is simple: if you want the best substitute competition, just let it be.

Substitute competition lowers prices and increases product availability.

Again, there is no mystery here. The only mystery being, what excuse will politicians’ drones come up to intervene in the market.

 

INDIRECT COMPETITION

This type of competition is also easy to understand. All products and services are competing against customer’s money. There is only so much money available for purchases and too many offerings. Hence, products & services that satisfy customer’s needs the best will be rewarded with purchases and their manufacturer’s with profits. Those who do not, will produce loses.

As is to be expected, indirect competition requires the development of new products and services, which is costly and time consuming. We could call this “Plan C”. If direct or substitute competitions are not possible, then manufacturers’ will resort to “Plan C”. It is only logical.

Because all products and services compete against all products and services through this type of competition, they force other competitors to make their products and services more appealing to customers. One way to do so is to lower prices. Another way to do so is by creating instant satisfaction, this means having said products & services in stock all the time.

And hence, indirect competition also lowers prices and increases product availability.

And again, there is no mystery here

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to We don’t need no stinking competition - Part 3

 

 

 

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