Tuesday, January 01, 2008


Our economic opinions are often influenced by our perceptions of how our decisions will influence the competitive environment faced by ourselves and others as producers. The nature of the competition that we face not only influences our productivity, but also influences our personal lives and social structures.

I'd like to see greater consideration of the impact of competition on our lives, but that seems to be difficult in the absence of a formal description of the competitive environments that we may face. If you, dear reader, are familiar with any writings on these issues, please point me to where I may find them. Otherwise, please consider the following analysis and provide any feedback that you may have.

I think that our competitive environments can be described by a point along a spectrum, ranging from monopoly, to competition, to hyper-competition. These environments are described in detail below, but I am specifically interested in hyper-competition, since I have never seen a discussion of this environment*, despite it's widespread occurrence in our economy.

Monopoly (including self-sufficiency): The condition where an actor's welfare is not influenced by competition. Economically, this arises when demand is satisfied by a single producer. The simplest example is an individual producing a good for his own use. However, producers can increase demand for (and hence, the value of) their produce by engaging in markets with others. The standard definition of "monopoly" applies to this condition, where a market is supplied by a single producer, who typically sees very large returns on his productive labors.

Competition: The condition where an actor's welfare is primarily determined by his own actions, but the benefit is limited by others seeking to access to the same resource. Economically, this arises in markets where multiple producers are satisfying the cumulative demand of consumers. Consumers are free to choose among the producers, meaning that producers will be unable to sell their produce unless they compete effectively with the other producers. This is the competitive structure that is typically studied in introductory Economics courses, where market prices tend towards the cost of production.

Hyper-competition: A competitive structure where an actor's welfare is solely determined by his performance relative to others. Hyper-competition is characterized by "winner-take-all" dynamics, and epitomized by sports and politics. Economically, this may take many forms, but it may arise from intense competition for access to monopoly benefits. A good example of this is our patent system, where "inventors may work independently for years on the same invention, but one will beat the other to the patent office by an hour or a day and will acquire an exclusive monopoly, while the loser's work will then be totally wasted."**

Many parts of economy seem to share this structure, to a lesser extent. I propose three ways that hyper-competition may arise:
  1. From inflexible demand, such that productive innovations do not expand the market--they only displace other producers.
  2. From formal bottle-necks in market-entry. One example would be an educational system where school admission is very competitive, but once accepted, students are almost guaranteed to succeed.
  3. From informal bottle-necks in market entry, arising from bounded rationality (limited information processing ability). This may arise from a positive-feedback loop where successful exploitation of one opportunity produces a reputation that leads to greatly expanded opportunities.
Along this competitive spectrum, I expect to see a change in how much reward a person receives for each unit of good that he produces. Under monopolistic conditions, the law of diminishing returns dominates, and rewards decrease with each unit of production. In competitive conditions, market prices are independent of one's own produce, so the producer gains a constant reward for each unit produced. In hyper-competitive conditions, the producer's reward per unit increases as total production increases (this increase may be continuous, or involve thresholds).

Overall, hyper-competition might be expected to produce Pareto distributions in human achievement, where success is not directly proportional to skill, but instead increases as a power function of skill. Conversely, the reduction of hyper-competition would put greater emphasis on the "long-tail". It's interesting to note that a progressive income tax may counter-act the influence of hyper-competition on income.

Any thoughts are appreciated.

*A Google search for "hyper-competition" turned up two concepts. Most prominently, a business-school professor has been using the term to describe a gradual erosion of market imperfections, thereby eliminating many semi-monopolistic advantages held by assorted producers; this is not what I'm talking about. My concept is most closely reflected by the writings of some random blogger, who discusses "winner take all" market conditions, specifically with respect to high-tech entrepreneurship.

**This quote is from Ayn Rand's essay on Patents and Copyrights, which I remember as the epitome of what I dislike about Rand. Her rejection of this "objection to patent laws" is quite dismissive, even as it exhibits glaring circular logic.

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