“This is Shooter’s tour!’ (Shooter McGavin – Happy Gilmore)
Keeping us honest…
Amidst the gathering drumbeat for another World Cup, I’m sure many won’t feel the need for a lecture on the merits of competition. However, this subject is at the heart of the several of the most important questions currently confronting investors. Competition has been a powerful and mostly positive force for the world economy over time. It has helped keep many states, companies and indeed individuals honest over many centuries. However, establishing some rules of the game is not only central to minimising the inevitable negatives but also requires constant evolution as technology and other inputs change over time. From China’s muscular rise to the global dominance of a handful of US tech stocks, there is a sense that those rules and how they are enforced need updating. Below we explore some of the major themes to consider.
What can prices tell us?
Much of our current framework for judging corporate competition centres on the effects on consumer prices. The threat of monopolists (companies dominating a particular marketplace) has long been thought to be found in the prices we pay for their wares. Without the disciplining effect of competition, theory, (and some experience), shows that monopolists can raise prices to their hearts’ content. To that extent, competition authorities have focused on consumer prices as shorthand for whether an industry is sufficiently competitive, or not.
However, the last few decades have seen the rise of several corporate giants which have monopolised industries (and indices), with little-to-no negative effect on consumer prices. In fact, the reverse has often been true. Many of the services which these modern titans provide have been free. The same is true of China’s muscular rise these last few decades – the effect has frequently been powerfully disinflationary for the world’s consumers. Can we therefore relax and assume that the immense scale and influence (laced with industrial subsidy with regards to China) of the titans are a net positive for global society?
Winner takes all?
From the perspective of companies, proliferating winner-take-all markets have clearly played an important role. This concept describes a market in which a product or service that is favored over the competitors, even if only slightly, receives a disproportionately large share of the revenues for that class of products or services. In most traditional lines of manufacturing and services – for example, furniture, shoes, chemicals, cars, banking, catering – there are anywhere from a handful of competitors to thousands. No company can hope to control the market, or to operate with average costs significantly below those of their competitors.
However, with ‘information’ products and services, these rules have changed. A software programme can capture an entire market. Or get no market share at all. A movie may become a blockbuster or go straight to the digital equivalent of the bargain bin. As a result, companies competing in these areas can be willing to pay very high wages to employees they believe are even slightly better than their competitors, in the hopes of winning in such lottery like markets.[1] Meanwhile, most early analysis of the internet assumed that the reduction in search costs implicit in this technological breakthrough would make prices of goods and services more easily comparable and therefore ultimately lower corporate profit margins. However, the returns to scale and the emergence of global markets capable of being dominated by one player easily overwhelmed this factor.
Perhaps this will all change. Many of the technologies currently emerging could end up playing a levelling hand if they reach their much-hyped potential. Perhaps the communications revolution and blockchain will interact to undermine the case for multinational mega corporations. After all, many of the arguments that underpinned the existence of these corporate leviathans, from transaction costs to trust across borders, are already melting away.2 As usual with predictions of the future, humility and its investing equivalent, diversification, will likely be a valuable trait for investors.
Competition and innovation
The Swedish economist, Carl Benedikt Frey, is one of the most recent thinkers to meditate on the effects of concentrated power on competition and its deadening impact on innovation. He describes how the concentration of state power waxes and wanes over centuries, evidencing the undulating effects on a region’s dynamism.[3] The same themes can be seen in the effects of increasingly unassailable businesses, such as those mentioned above, on productivity and dynamism elsewhere.[4]
Social scientist, Lingfei Wu led an effort to analyse some 65 million papers, patents and software projects from the postwar years to the internet era.[5] He and his team found convincing evidence that solo inventors and decentralised teams consistently generated more disruptive ideas and technologies, whereas larger and hierarchical ones focused on developing existing ones – “Like movie studios, they produced sequels instead of new narratives.”[6] Economy-wide productivity suffers as a result.
Conclusion
As before, our future rests on the potential genius, creativity and problem-solving capacity of all of our fellow earthlings, not just a prominent few. Luckily, there are now a lot of us increasingly tooled up with education, opportunity and the technology to make a difference. Just as in prior episodes where communication distances were decimated by technological change, whether by printing press or transatlantic cable, we must navigate a messy readjustment period to reach another golden age on the other side. In many ways, this has been the story of our journey to modernity. As the problem-solving of our ancestors allowed for an ever larger, more interconnected and wealthy global population, new problems associated with scale emerged –competition and the rules governing it are all too familiar here.
The printing press, which made possible the first truly mass media, fanned the flames of religious war in Europe, redrawing maps and claiming millions before their time in the process. However, in every case, the enormous usefulness of these technologies has so far outweighed their potential harms that it is now hard to imagine a world without them. As to the internet and social media, we are still in very early days. There is good reason to expect that these tools will be modified over time to amplify their virtues and mitigate their defects. Likewise, there is good reason to expect that we will gradually adapt to these technologies, learning to use them more effectively while reducing our vulnerability to distraction and manipulation.
1Guy, Frederick (2009) The global environment of business – Oxford2 Roots of Progress – Jason Crawford – What is happening in the world? May 3rd 20263 Frey, Karl Benedikt (2025) How Progress Ends – Technology, Innovation and the Fate of Nations – Princeton University Press4 Various (2023) – The Economics of Creative Destruction – new research on themes from Aghion and Howitt, edited by Ukuk Akcigit & John Van Reenan – Harvard University Press. Particularly chapters 3 – 5 on ‘competition and international trade’ and chapter 11 – ‘Productivity growth and real interest rates: a circular relationship’.5 On large vs small teams, see Wu, et al, “Large Teams” 378 – 382. On flat vs hierarchical teams, see Wu, et al, “Flat teams drive Scientific Innovation” e22009171196 Frey, Carl Benedikt (2025) How Progress Ends pp17
Contact us
0203 418 0257
info@onekc.co.uk
References
Source: https://www.brooksmacdonald.com/insights/the-importance-of-competition
The importance of competition
The importance of competition
“This is Shooter’s tour!’ (Shooter McGavin – Happy Gilmore)
Keeping us honest…
Amidst the gathering drumbeat for another World Cup, I’m sure many won’t feel the need for a lecture on the merits of competition. However, this subject is at the heart of the several of the most important questions currently confronting investors. Competition has been a powerful and mostly positive force for the world economy over time. It has helped keep many states, companies and indeed individuals honest over many centuries. However, establishing some rules of the game is not only central to minimising the inevitable negatives but also requires constant evolution as technology and other inputs change over time. From China’s muscular rise to the global dominance of a handful of US tech stocks, there is a sense that those rules and how they are enforced need updating. Below we explore some of the major themes to consider.
What can prices tell us?
Much of our current framework for judging corporate competition centres on the effects on consumer prices. The threat of monopolists (companies dominating a particular marketplace) has long been thought to be found in the prices we pay for their wares. Without the disciplining effect of competition, theory, (and some experience), shows that monopolists can raise prices to their hearts’ content. To that extent, competition authorities have focused on consumer prices as shorthand for whether an industry is sufficiently competitive, or not.
However, the last few decades have seen the rise of several corporate giants which have monopolised industries (and indices), with little-to-no negative effect on consumer prices. In fact, the reverse has often been true. Many of the services which these modern titans provide have been free. The same is true of China’s muscular rise these last few decades – the effect has frequently been powerfully disinflationary for the world’s consumers. Can we therefore relax and assume that the immense scale and influence (laced with industrial subsidy with regards to China) of the titans are a net positive for global society?
Winner takes all?
From the perspective of companies, proliferating winner-take-all markets have clearly played an important role. This concept describes a market in which a product or service that is favored over the competitors, even if only slightly, receives a disproportionately large share of the revenues for that class of products or services. In most traditional lines of manufacturing and services – for example, furniture, shoes, chemicals, cars, banking, catering – there are anywhere from a handful of competitors to thousands. No company can hope to control the market, or to operate with average costs significantly below those of their competitors.
However, with ‘information’ products and services, these rules have changed. A software programme can capture an entire market. Or get no market share at all. A movie may become a blockbuster or go straight to the digital equivalent of the bargain bin. As a result, companies competing in these areas can be willing to pay very high wages to employees they believe are even slightly better than their competitors, in the hopes of winning in such lottery like markets.[1] Meanwhile, most early analysis of the internet assumed that the reduction in search costs implicit in this technological breakthrough would make prices of goods and services more easily comparable and therefore ultimately lower corporate profit margins. However, the returns to scale and the emergence of global markets capable of being dominated by one player easily overwhelmed this factor.
Perhaps this will all change. Many of the technologies currently emerging could end up playing a levelling hand if they reach their much-hyped potential. Perhaps the communications revolution and blockchain will interact to undermine the case for multinational mega corporations. After all, many of the arguments that underpinned the existence of these corporate leviathans, from transaction costs to trust across borders, are already melting away.2 As usual with predictions of the future, humility and its investing equivalent, diversification, will likely be a valuable trait for investors.
Competition and innovation
The Swedish economist, Carl Benedikt Frey, is one of the most recent thinkers to meditate on the effects of concentrated power on competition and its deadening impact on innovation. He describes how the concentration of state power waxes and wanes over centuries, evidencing the undulating effects on a region’s dynamism.[3] The same themes can be seen in the effects of increasingly unassailable businesses, such as those mentioned above, on productivity and dynamism elsewhere.[4]
Social scientist, Lingfei Wu led an effort to analyse some 65 million papers, patents and software projects from the postwar years to the internet era.[5] He and his team found convincing evidence that solo inventors and decentralised teams consistently generated more disruptive ideas and technologies, whereas larger and hierarchical ones focused on developing existing ones – “Like movie studios, they produced sequels instead of new narratives.”[6] Economy-wide productivity suffers as a result.
Conclusion
As before, our future rests on the potential genius, creativity and problem-solving capacity of all of our fellow earthlings, not just a prominent few. Luckily, there are now a lot of us increasingly tooled up with education, opportunity and the technology to make a difference. Just as in prior episodes where communication distances were decimated by technological change, whether by printing press or transatlantic cable, we must navigate a messy readjustment period to reach another golden age on the other side. In many ways, this has been the story of our journey to modernity. As the problem-solving of our ancestors allowed for an ever larger, more interconnected and wealthy global population, new problems associated with scale emerged –competition and the rules governing it are all too familiar here.
The printing press, which made possible the first truly mass media, fanned the flames of religious war in Europe, redrawing maps and claiming millions before their time in the process. However, in every case, the enormous usefulness of these technologies has so far outweighed their potential harms that it is now hard to imagine a world without them. As to the internet and social media, we are still in very early days. There is good reason to expect that these tools will be modified over time to amplify their virtues and mitigate their defects. Likewise, there is good reason to expect that we will gradually adapt to these technologies, learning to use them more effectively while reducing our vulnerability to distraction and manipulation.
1Guy, Frederick (2009) The global environment of business – Oxford2 Roots of Progress – Jason Crawford – What is happening in the world? May 3rd 20263 Frey, Karl Benedikt (2025) How Progress Ends – Technology, Innovation and the Fate of Nations – Princeton University Press4 Various (2023) – The Economics of Creative Destruction – new research on themes from Aghion and Howitt, edited by Ukuk Akcigit & John Van Reenan – Harvard University Press. Particularly chapters 3 – 5 on ‘competition and international trade’ and chapter 11 – ‘Productivity growth and real interest rates: a circular relationship’.5 On large vs small teams, see Wu, et al, “Large Teams” 378 – 382. On flat vs hierarchical teams, see Wu, et al, “Flat teams drive Scientific Innovation” e22009171196 Frey, Carl Benedikt (2025) How Progress Ends pp17
Contact us
0203 418 0257
info@onekc.co.uk
References
Source: https://www.brooksmacdonald.com/insights/the-importance-of-competition
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