In Canada, like most everywhere in the world, the markets are not free. For example, the Canadian government has targeted some key industries in which it restricts competition and foreign competition in particular: financial services, transportation, natural resources, and telecommunications. Somehow the government has deemed that these industries are “strategic” and companies in them must be Canadian (-owned). The limited competition in these industries and others is bad for everyone, including the companies (their shareholders) themselves.

Most people get it that lack of competition harms consumers: Canadians pay some of the highest prices for cell phone service because there are only a few competitors in the telecommunications market, with not much incentive to lower prices or to improve service. (The recent comments welcoming foreign competition by CEO of Telus, one of the large players, offered a glimmer of hope to Canadian consumers for wider range of cell phone services and prices. Now, if the government only lifted the foreign ownership restrictions …). Another example of consumers suffering from restricted competition is the Canadian airline industry. The government prevents cabotage—foreign-owned airlines initiating flights from Canada, and again Canadian travelers pay more than those in more competitive markets.

But what many do not realize is that lack of competition harms also the companies themselves. They are often perceived as complacent “fat cats” because they can charge high prices or sell subpar products and services. It is true that government protectionism can benefit “fat cat” companies in the short term, but in the increasingly global world, countries and companies that insulate themselves from competition will miss out its benefits.

One of the biggest benefits of competition in free markets is innovation: new, better and cheaper products and services, or better ways of providing them. Only companies faced with constant competition are pushed to innovate: think of consumer electronics companies such as Apple, Samsung, and Blackberry. And those that are protected from competition and strangulated by government regulation will be the least innovative: think of health care or mail delivery, not just in Canada but in most countries. It is what economist Joseph Schumpeter called the “creative destruction” of competition that leads to innovation—and value both for consumers and for shareholders of companies.

Countries cannot protect companies from competition and remain self-sufficient “islands” forever—not unless they want to become stagnant backwaters with declining prosperity and well-being for their residents.

Competition has value also for individuals—the same principle applies, which is also difficult for many people to grasp. We like competition among companies that sell us goods and services, but not so much when we have to compete for jobs. But competition for jobs is also good for us. Let’s assume that you are looking for a job and find a company advertising one that seems to match your qualifications and interests. Why is it in your interest that you are not the only applicant for that job? For the company to be able to offer that or any other job, it must have a pool of qualified applicants so that it can find a suitable candidate who will help its productivity and competitiveness. If only one person applied for any job the company offered, it could not hire the talent it needs to compete successfully.

You of course would like to get this job, but because of competition you may not. Even if you do not get the job, competition is in your interest, provided that the employer acts rationally and hires the most qualified candidate. It’s certainly disappointing if you do not get the job. However, if the company acted rationally and hired the best candidate, it is indeed in your interest that you lost in this particular competition. The more qualified candidate who was hired will be more productive than you would have been in the same job, which makes the company more competitive and enhances its performance. This means that it will create more wealth, leading to other job opportunities, some of which will better match your qualifications, either at this company or elsewhere.

Competition and free markets are good for us, as they make us strive to do our best, leading to more value creation. It is wrong of governments to interfere with markets, whether through protectionism or other regulations restricting our freedom to trade and compete.

3 COMMENTS

  1. An example of the benefit of a free market with justice system is the personal computer industry, which has little regulation beyond electrical and radio interference rules applying to many types of electrical devices. It keeps providing more for the same or lower price. Those who got complacent, like Wordstar and Wordperfect companies did in the word processing sector, were supplanted by someone else. An operating system vendor did as well, so Microsoft got a big start by improving an o/s they bought from a business that no longer needed the software but could use the cash.

    I dislike the “creative destruction” notion, what is actually happening is positive – winning customer business by doing better.

    The Post Office is a good example of an industry whose stuck-in-mud thinking fostered competition despite regulation. Fred Smith believed that many people would pay a large premium for predictable delivery of documents. His perfessor disagreed so only gave him a C on his thesis, but Fred persevered – his Federal Express operation started an industry.

    A key factor is just getting organized and doing the job. Federal Express did that with coordinated flights in and out of a central sorting hub. And airlines were getting much business with heavier freight because they organized their terminals to process shipments much more quickly than trucking companies and railroads did not – IOW, the speed of transport method was not the complete picture, ground handling was a major factor that could take as much time as the cross-continent ground transportation.

    • Good points, Keith! –I think “creative destruction” is not a negative term but very descriptive: inferior products and processes (such as WordStar and Wordperfect) do get “destroyed” when new, better ones are created. We don’t use typewriters anymore (or mechanical typesetting), or cassette tapes, video tapes, or Walkmans, but something better,

      Thanks also for sharing a link to your post on monopolies!

  2. http://www.keithsketchley.com/monopol3.htm covers whether or not monopolies can occur in a free market, and mentions other examples of how competition arose even in the face of government force.

    “Buy local” is the anti-competitive fad in Victoria today – I think it is based on a fallacy. Why wouldn’t people buy from local suppliers if selection, quality, and efficiency are good? Obvious benefits are freshness and ease of communications. Yet people make excuses for poor quality local goods, like carrots.

    People have long traded – tribal routes on foot in middle BC and east Africa for example. Years ago a tribe in the Victoria area traded with one on the Columbia River, despite language differences. That’s an arduous journey by canoe even in summer. OTOH the tribe just across the Strait of Juan de Fuca were not honest – they attacked instead of traded.

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