Radical innovation rarely comes from within

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The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure.

How much competition is enough? Many important markets are dominated by a few large companies. The big four accountancy firms undertake the audits of almost all large corporations. Most current accounts are held at a small number of retail banks. You have a choice of perhaps three or four mobile phone networks. The list of similar oligopolies can easily be extended.

In all these industries, established businesses will tell you that they welcome competition. But, these companies will often explain, enough is enough. Users already have a wide choice of products and suppliers. Measures to encourage new entry, or to prevent incumbents from making mergers and acquisitions, or – worst of all – to give others access to the facilities these incumbents have expensively constructed, are certainly inappropriate and probably harmful.

The background is one in which many private and public monopolies have been dismantled. In telecommunications your choice for 100 years was to take what the local telephone provider offered or to leave it. But consumers now have a bewildering variety of choice. They certainly don’t need more. The priorities of public policy should be directed elsewhere – to promoting investment and innovation. Global competitiveness, not domestic competition, is what matters. Government departments and regulators have been more and more ready to accept these arguments.

But competition and competitiveness have different meanings in different contexts. The choice between Tweedledum and Tweedledee is important to Tweedledum and Tweedledee, but not to anyone else. When several importunate Cairo guides offer to lead you to the Great Pyramid, your decision may determine whether their children eat that day. To the visitor, it doesn’t matter at all.

The brand managers of Procter & Gamble, Unilever, Kraft and Nestlé obsess over the details of packaging and product. But companies must work hard to maintain differentiation precisely because the differences are inconsequential to users. And so it is that accountants, banks and mobile phone companies see themselves as engaged in intense competition while customers think they are all the same. Competition as businesses perceive it is not at all the same as competition as consumers perceive it.

Courts and antitrust agencies see competition differently still. In recent years, they have built an analytic structure of their own that describes a very different world from that of marketers or consumers. These approaches use acronyms such as SLC (significant lessening of competition) and the somewhat disconcertingly labelled SSNIP (small but significant non-transitory increase in price). Put simply, the test of sufficient competition is whether a company can put its prices up without suffering unsustainable loss of market share. The existence of four or five active companies in an industry is generally enough to satisfy the tests required by SLC and the SSNIP.

But the benefit of competition is not just that it serves customers’ needs today, but that it is a mechanism for adapting to what they will need tomorrow. The dynamism of a market economy comes from innovation in products and processes, and radical innovation in products and processes often – in fact usually – comes from outside the existing market structure. Apple is changing the nature of the phone industry, Amazon the book business. But anyone who had approached these industries from the marketing or the legal standpoint would have concluded that there was enough competition already.

You cannot prove that innovative entry will benefit consumers because if you could prove it such entry would already have occurred, and you would be a successful entrepreneur not a regulator or a judge. And most innovation fails, which is why successful entrepreneurs are richer than judges and regulators and unsuccessful ones poorer. There is never enough competition and the economy which takes that view is the economy which has ceased to progress.

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