What Is “Competition” Anyway?

You know the word “travesty”? People who want to sound smart sometimes use it instead of tragedy, as if it’s the smart person’s version of tragedy. But it’s not. They use the word even though they don’t know what it actually means.

People do the same thing with “competition.” Many think it’s either the solution to everything or the cause of all evil . . . even though they don’t seem to know clearly what it means.

It turns out, I can’t fault them. This is a longstanding issue. Maybe I’m just ignorant of some classic economics textbook that has the grand master definition in it (you’d think they would have covered it in the econ classes I took), but man is it hard to find a definition of this word! I was especially hoping to find one from at least one of the classic economic thinkers. This is the best I could come up with . . .

Adam Smith didn’t use the word very much. Here’s the main example of how he thought of it, taken from The Wealth of Nations, Book IV: “The competition of producers who, in order to undersell one another, have recourse to new divisions of labour, and new improvements of art, which might never otherwise have been thought of.” So, in his mind, competition was simply improving manufacturing processes to undersell competitors?

And Joseph Schumpeter, who even still has a type of competition named after him (“Schumpeterian competition”), didn’t offer up a definition that I could find either. The closest thing is what he wrote in Capitalism, Socialism, and Democracy: “But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” He’s taking the term as a given and focusing on a specific type of it–the type related to how new innovations impact competition.

Even Michael Porter, in his book Redefining Healthcare, never provides a definition. He says things like this though: “The way to transform health care is to realign competition with value for patients. Value in health care is the health outcome per dollar of cost expended. If all system participants have to compete on value, value will improve dramatically.” He felt the need to define value, but never competition, and, like the others, took the term as a given.

And I’m completely skipping over all the definitions of “perfect competition,” which describes everything around a special case of competition without actually defining it either.

How about Wikipedia? It at least offered a definition! In the article Competition (economics), it says, “Competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place.”

Competition is a scenario? And the main focus is that firms are trying to obtain goods? This one sounds really smart, but I disagree with it. I also believe it doesn’t facilitate a clear understanding of the concept.

So it’s time I offer up my own definition. Maybe I’ll change it over time as I learn more. But for now, this is what I’ve got:

Competition is a state in a market where there are multiple companies trying to win more profit by convincing potential customers to choose their product or service because it will meet their needs in a higher-quality and/or lower-priced (i.e., higher-value) way than other companies’ offerings.

I’ll unpack that.

First, it’s a state of being. Markets can exist in a state of competition or not. Really, it’s a continuum from no competition at one end to perfect competition at the other end. But the bare minimum needed for it to exist is for there to be multiple companies fighting for limited profits, which are the prize. If this is a non-profit environment, then we’ll call profits “surpluses.” Same idea. And to win those profits, they need to convince potential customers to choose them over their competitors. There’s always a mix of strategies–high-profit low-quantity vs. low-profit high-quantity–but the end goal with all of them is to win the most profit. I recognize that more and more companies are “mission driven” rather than “profit driven.” That’s great and all–I guess they’re willing to give up some profit to achieve their mission. But the stark reality is that they need to earn enough money to continue achieving their mission, which means they still have a strong profit motive if they want to sustain and grow.

I’m deliberately not defining which companies count as being in a market because it depends on the needs of people. For example, Ford’s new F-150 Lightning (an electric vehicle that can even use its battery to power your house) technically is filling the same need as people shopping for an emergency back-up generator, which means for that customer segment Ford is competing with generator companies. Competition often spans the traditional boundaries of markets.

And I said “convince” potential customers because people make a purchase decision based on the information they have. It’s not enough to be objectively better in every respect. It only matters if you convince people who are looking for a solution to fill their need. Long-term, yeah, you generally need to actually be higher-value to keep customers, at least if there’s enough information available to potential customers to make the market somewhat transparent.

So there you go. An actual attempt at a definition of competition. And, thinking about it now, isn’t it a wonderfully desirous state to strive for? I hope this definition is useful in helping you think about what you are meaning when you use the word.

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