Economic freedom is the heart of free-market capitalism. Freedom and competition are significant reasons why capitalism provides greater prosperity. An April 5th Wall Street Journal article (Gillette, in Change, Shaves Prices by Sharon Terlep) provides an opportunity to discuss competition.
The article describes Gillette’s situation as follows:
“Gillette, which dominates the global razor business, has long followed a simple and lucrative strategy: Add new features and raise prices.
But the 115-year-old brand is changing tactics this month by slashing prices and putting a new focus on its cheaper products.”
Why is Gillette changing tactics?
Why is Gillette cutting prices? Because they have been losing market share. According to the article, data from Euromonitor shows that Gillette’s share of the U.S. market has dropped from over 70 percent in 2010 to 54 percent in 2016.
Why is Gillette losing market share? Because online startups like Dollar Shave Club and Harry’s have been gaining share by selling lower-priced razors and refills.
The article says the cost of a Gillette refill cartridge ranges from $2 to $6, as compared to $2 to $2.75 for Schick, and only 20 cents for the cheapest Dollar Shave Club option. I don’t claim this is a comprehensive price comparison, but it does suggest that Gillette has high-end prices.
Competition provides solutions
This is how free markets work. Sometimes companies will build dominant market positions, as Gillette has. If they become dominant by pleasing their customers and beating their competitors in free and fair competition, this is not such a bad thing.
But bad things can occur after companies become dominant. For example, dominant companies may become slow and bureaucratic. They may also become less innovative. In fairness, I don’t know if any of this applies to Gillette.
Dominant companies also tend to raise their prices. They are the best and they charge accordingly. This does appear to apply in the Gillette case.
Luckily, free markets have a solution for high prices. It’s called competition. After a dominant company starts to raise prices and make greater profits, those higher profits then entice other companies and entrepreneurs to enter the market with competing products. The newcomers under-cut the market leader on price and start to whittle away the market share of the leader. This is exactly what has happened in the Gillette case.
Competition good for consumers
Competition is good for consumers. In free markets, businesses compete with each other to win customers. How? By offering lower prices, higher quality, innovative new products, or easier ways to buy their products. This is good for consumers.
The purchasing decisions of consumers also determine which companies and products win in the marketplace. This ensures that consumers can get whatever products they value. This matters. Ask Venezuelan consumers.
Gillette’s response to increased competition is to boost efforts to please consumers. They are lowering prices and increasing focus on low-end razors, but they also plan to continue developing high-end razors. All of this gives consumers more choices. They can choose high-end or low-end razors. They can choose to buy from Gillette or a newcomer. Consumers are therefore more likely to be satisfied.
Benefits of competition
Free-market competition provides an array of benefits:
- Competition allows superior products to win in the marketplace, so inferior products get replaced by something better.
- Competition encourages innovative new products. They often command high prices at first, but after competition drives prices down, the innovation remains. This benefits all of us.
- Competition restrains companies from offering shoddy products or charging high prices. When consumers have choices, they can and will take their business elsewhere.
- Competition also restrains companies from abusing workers. When workers have a choice of employers, employers must treat employees fairly or they will seek jobs elsewhere.
- Competition keeps the profitability of companies in check. If one company makes abnormally large profits, others will enter the market to try to gain some of the large profits.
Overall, competition leads to better products, lower prices, more innovation, more choices for consumers and workers, and therefore greater economic prosperity.
The concept is simple yet powerful. Freedom, competition, and the decentralized decision-making of millions of consumers provide society with the best chance of widespread prosperity.
This does not mean that free-market competition is perfect. It is not. For example, it may not always deliver good results as quickly as we’d like. But nothing else is perfect, either! Free-market competition works better than any alternative.
Capitalism encourages competition…
Competition is only possible when people have choices. People only have choices when they are free to choose. The freedom and choice of free-market capitalism naturally lead to competition.
Consumers must be free to choose what they buy, from which company, at which price, and also when, how, and where they buy. Businesses must be free to compete with each other on price, product features, product quality, and when, how, and where they sell.
True capitalism also makes it easy to create new start-up business that can compete with existing companies.
…Government squelches competition
Government, on the other hand, is inherently slanted towards reducing choice and competition. Think mandates, fees, duties, taxes, regulations, occupational licensing, etc. Telling buyers and sellers what they must do (or cannot do) is the basic DNA of government. Big Government makes it harder to start a new business.
In addition to the inherent nature of government, businesses sometimes try to use the power of government to reduce competition for themselves. Businesses might seek to block a competitor or impose a burden on them, or perhaps seek an advantage for themselves such as a special tax break.
Squelching competition a mistake
A desire to avoid competition is ancient and usual, but limiting competition is a mistake. It might benefit one person or one company, but is likely not good for society as a whole.
When government squelches competition, it reduces the benefits mentioned above. This partly explains why Big Government reduces prosperity. As is often the case, the better solution is to make government small.
I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.