Competition Overdose: How Free Market Mythology Transformed Us from Citizen Kings to Market Servants

Is competition always the answer to underperforming markets?

Winter 2021 • Cato Journal
By Thomas A. Hemphill

Is competition always the answer to underperforming markets? Maurice E. Stucke, a professor at the University of Tennessee College of Law, and Ariel Ezrachi, the Slaughter and May Professor of Competition Law at the University of Oxford, unequivocally answer “no.” Introducing competition often unleashes free‐​market forces to increase consumer options, lower prices, and improve the quality of products and services. However, the authors emphasize a dark side of competition where certain private‐​market solutions can increase economic inequality, stifle entrepreneurship and innovation, injure consumers both physically and financially, and destroy competitive industry ecosystems.

In Part I (“When Is Competition Toxic?”), Stucke and Ezrachi offer examples of “overdoses” of economic competition and how they are misused, while explaining why they continue to proliferate. For instance, the authors explain how competition harms both university competitors and their intended student and parent beneficiaries. In the case of highly selective/​elite universities, such as Harvard, Stanford, and others, competition for students is partially dependent on national rankings found in the annual university and college ranking (based on 15 key measures) of the U.S. News and World Report. Such rankings can create a positive feedback loop (i.e., a rise in the annual ranking attracts more “star” students) or a negative feedback loop (i.e., a decline in the annual ranking attracts fewer “star” ­students).

One metric is the acceptance rate: the lower a university’s acceptance rate, the more selective it is and the better it performs in the rankings. This “toxic competition” has many universities expending financial resources on the competition itself rather than on improving their educational product or service. But universities can neither deescalate this academic “arms race” (as they fear the consequences of unilaterally opting out and similar competitors filling the gap and increasing their applicant pools), nor can the students (and parents) who are looking for the best “route” to upward social ­mobility—a prestigious education that will help ensure their future economic survival. Is the latter behavior rational thinking on the part of students and parents? Perhaps, but the authors indicate that many non‐​Ivy League graduates compare well in median earnings to Ivy and elite schools, as well in the value the institution delivers in improving students’ skills.

Another cited example of a competition overdose is “choice overload.” Many policymakers, economists, and businesspeople believe that the greater the volume of consumer choices, the better. But how much choice do consumers want, and how much should businesses provide? Research studies (including a much‐​cited 2000 study by Sheena Iyengar and Mark Lepper) show that when consumers have too many product or service choices, they become overwhelmed with “cognitive costs,” becoming inhibited about making choices. In fact, from the business perspective of generating revenue, this situation can result in the worst‐​case scenario—consumers not purchasing any product. Yet, the authors concede that other research studies have not shown evidence of choice overload or have revealed mixed empirical results.

Why does choice overload occur? One reason is that humans have to think more as the number of options increases. Rational, deliberative thinking is tiring, resulting in brain fatigue. Another reason is that choice overload may lead to choice avoidance, even when any choice is preferable to not choosing. Or, if we do choose, the mental stress involved in considering excessive options and product attributes can reduce the likelihood of our pursuing other, better options. Last, after we finally purchase (after calculating the many tradeoffs posed by the many options), we may experience buyer’s regret because of considering more counterfactuals (“what ifs”) about the options not chosen. Yet choice overload is dependent on so many situational and individual factors that there is no definitive number of options that will prove to be the “trigger” to initiate ­overload.

So how do businesses react to choice overload? The authors’ answer is threefold. First, they offer decision aids to reduce the mental burden and counterfactuals. An example is free in‐​flight entertainment guides, which display the offerings under headings, such as Film, Television, and Music, and then under subcategories within each. With the airlines having no incentive to overwhelm us, we expend less energy and our consumer satisfaction in our choice can increase. Second, retailers can offer fewer options per product category, increasing the likelihood of the consumer purchasing a product while increasing purchasing satisfaction. Club stores, like Costco, offer fewer choices in terms of brand, size, and quantity of product, but promise much lower prices. Aldi and Trader Joe’s offer fewer choices too, but primarily their own labels. Third, a retailer can offer the product variety consumers demand, as they cannot unilaterally limit consumer choice without losing profits, so they offer the variety demanded. Amazon is an example of these first and third marketing approaches, attracting consumers with its many choices within its many product categories.

In Part II (“Who Is Pushing the Toxic Competition?”), Stucke and Ezrachi identify four culprits behind competition overdose. In the first instance, ideologues have wholeheartedly embraced the mantra that competition is always per se good, fair, or just for the benefit of all in society—in spite of numerous examples where there is suboptimal competition (e.g., “lemon markets” for automobiles), negative externalities (e.g., environmental pollution from manufacturing operations), and public goods (i.e., characterized by the authors as “without an ability to charge for the benefit, market forces may not necessarily provide this public good”). Nevertheless, the antitrust laws, the courts, policymakers, and the business community all demand competition—even if it is just in an abstract sense.

In the second instance, lobbyists argue in favor of minimal business regulation and embrace a reductive competition ideology to profit at society’s expense. Stucke and Ezrachi describe this four‐​step process by which competition ideology is used to deregulate. First, they advocate for trust in the full force of free‐​market competition. Second, they argue that because the marketplace offers a superior instrument to deliver services, the state’s role in regulating these markets should be limited. Third, they emphatically decry regulation as paternalistic and appeal to our rugged individualism and pride. Fourth, they actively frame the exploitive practice that an industry or business is or plans on embracing as a pro‐​competitive innovation. As the authors note: “Lobbyists utilize the competition ideology to support crony capitalism, militate against important regulation and safeguards, and ensure that power and money are allowed to subvert democracy.”

In the third instance, privatization becomes the elixir for inefficient, low‐​quality public services. In this case, Stucke and Ezrachi use the example of the proliferation of privately operated prisons in America. According to the U.S. Bureau of Justice Statistics, in 2019, privately operated facilities held 7 percent of state prisoners and 16 percent of federal prisoners. Studies have shown that because these prison enterprises are for‐​profit ventures, a high occupancy rate is the key to their corporate earnings. Moreover, it is a common practice for private prison corporations to “cream skim” the low‐​cost, profitable (“healthy”) inmates and offload the more expensive maintenance (“unhealthy”) inmates to state correctional institutions. The authors conclude that there is very little competition in today’s private prison market. According to a 2016 Brookings Institution study: “Based on available prison facility information, we calculate that the two largest private prison companies account for around 55 percent and 30 percent of all private prison beds, respectively, and the three largest firms provide over 96 percent of the total number of private prison beds.” Moreover, as the U.S. Bureau of Justice Statistics reported in 2016, there is no evidence that they actually save taxpayers any money. The cost savings promised by private prisons have simply not materialized.

In the fourth instance, Stucke and Ezrachi accuse “gamemakers” of being responsible for creating a toxic competitive dynamic that exploits the participants while primarily benefiting the creator. Facebook and Google are not just “providers of helpful and enjoyable products.” Their vast wealth, power, and sophistication elevate them to the level of gamemakers—architects of their own competitive environments. With consumer personal data the bounty for their advertisers (and the source of most of their revenue), the gamemakers, say the authors, are helping app developers on their advertising platforms to create increasingly addictive products for all age ranges, benefiting them with even more financially lucrative personal data provided by consumers. Lastly, for the consumer, it is nearly impossible for a consumer to “opt‐​out” of data harvesting if they are using the gamemaker products.

In Part III (“What Can We Do about It?”), Stucke and Ezrachi argue that there is no clear definition of “competition.” In antitrust policy, the law generally recognizes the economists’ understanding of the term; yet this definition often differs “from that of lawyers, policymakers, and laypersons.” The authors take aim at Chicago School law‐​and‐​economics theorists who characterize “economic competition as relentless zero‐​sum warfare, where some must lose for others to win.” In contrast, Stucke and Ezrachi propose a non‐​zero‐​sum alternative, based on emphasizing trust, collaboration, and fairness, that “can be positive sum—expanding the pie by developing new products, designs, and technologies that will satisfy needs currently unmet by those rivals.”

Stucke and Ezrachi identify four types of competition. First, there is toxic competition, which “clearly violates the criteria that require competition to promote overall well‐​being and abide by ethical standards.” Second is zero‐​sum competition, requiring one’s gain to be offset by another’s loss. While sometimes necessary in practice due to allocation of limited resources, it “may not always serve us or ­society, and it often requires us to disregard or outright violate our standards of fairness and morality.” Third is positive‐​sum, ethical competition, “a way of expanding the pie, so that most, if not everyone, benefit.” Moreover, this typology recognizes how ethics and morals can complement, and beneficially inform, the competitive process. Fourth is noble competition, “helping your rivals reach their full potential” through a “deep societal and moral awareness.” Noble competition involves each participant in a competition, while seeking to prevail in the marketplace, to be aware of a wider community and recognize how this competitiveness can help its rivals be their best selves. Ultimately, this lifts the level of competition and results in superior benefits for the society as a whole.

The authors take a tripartite approach in promoting aspirational noble competition. First, the state should play two roles in protecting its citizens from toxic competition: initially by employing a variety of legal strategies and then by actively providing what competition cannot deliver. Second, industries need to ensure healthy competition through self‐​regulation and to actively lobby for rules that will bring companies into compliance with those efforts. Third, consumers can dissent—both at the ballot box to elect candidates who support healthy competition and through consumer purchasing power—and support the type of competition they want to promote. In conclusion, Stucke and Ezrachi argue that “once we view competition as positive sum, we can support markets in which ethical trading and social awareness are celebrated alongside the profit motive.”

While the authors repeatedly discuss the virtues of competition (and their support of it), there is insufficient evidence of why it is their paradigm of choice. In this case, the reigning antitrust paradigm is the Chicago‐​based, utilitarian approach, which they allege supports (too often) a market “race to the bottom.” While in some cases there is sufficient evidence to support specific antitrust or regulatory intervention, such as the growing list of abusive anticompetitive behaviors associated with Big Tech, their arguments go well beyond “competition” in the narrow sense of antitrust policy.

Stucke and Ezrachi report that support for private prison facilities is on the upswing under the Trump administration. Yet the data show contrary indications. In 2016 (the last year of the Obama administration), Statista reports 128,323 prisoners were residing in private prisons in the United States. After the first two years of the Trump administration, the number of prisoners residing in private U.S. ­prisons had declined to 118,444, a decline of 7.7 percent nationwide. These most recent private prison capacity utilization numbers certainly do not represent positive news for the corporate earnings of GEO and Core Civic, the two largest for‐​profit prison companies in the United States, as they are having a negative impact on the private prison industry’s need for a high prisoner occupancy rate.

Furthermore, The First Step Act, passed by Congress in December 2018 and strongly supported by the Trump administration, gives federal judges greater leeway when sentencing some drug offenders and boosts prisoner rehabilitation efforts. It also would reduce life sentences for some drug offenders with three convictions, or “three strikes,” to 25 years. Another provision would allow about 2,600 federal prisoners sentenced for crack‐​cocaine offenses before August 2010 the opportunity to petition for a reduced penalty. Yet nowhere in the authors’ writings was there any indication of this recent downward trend in privately operated prison occupancy rates, nor the federal prison sentencing reform that would have further potential negative impact on these rates.

A weakness in their approach is that it needs to be offset with the many examples where existing competition is working to benefit consumers and society or how a specific regulatory intervention will improve the outcome for consumers and society. For example, under the Trump administration’s deregulatory and tax reduction agenda, the U.S. Census Bureau reported median or average‐​income family saw a pre‐​Covid‐​19 gain of nearly $5,000 (or 8.2 percent), as median family income in August 2019 was $65,976, up from about $61,000 when he entered office in January 2017. This is a notable empirical contrast to the authors’ use of data explaining income inequality for middle‐​income Americans, which reveals that the middle class (40th to 60th percentile) saw their net worth decline 7 percent to $68,839 between 2000 and 2011.

In addition, the concept of “government failure” did not appear until late in the book. Government failure, in the context of public policy, is an economic inefficiency caused by a government intervention if the inefficiency would not exist in a freely operating market. While the authors acknowledge that government has failed to regulate responsibly in many of their examples (and they offer a couple of specific antitrust exemptions to prevent the race to the bottom, such as when the U.S. government allowed hockey players to agree among themselves to wear helmets), their remedies also represent a ­progressive agenda of policy initiatives representing further economic expansion of the social “safety net”—such as legislating an increase in the minimum wage—which may also represent (in certain instances) a continuation of ongoing government failure.

Nevertheless, the authors are correct in their assessment of business, government, and consumers needing to focus on working to realistically attain a positive‐​sum, ethical form of competition. Their concept of “noble competition” seems a bridge too far and may likely resemble that of unattainable “perfect competition.” Reinforcing ethical competition is as much a necessity for a vibrant, innovative capitalist economy (as Milton Friedman recognized) as actively enforcing existing laws and regulations that prevent unfair competition.

About the Author
Thomas A. Hemphill