The markets are not free in most of the world which means that competition is curtailed. In Canada, the federal 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).

Limiting competition in these industries and others is bad for everyone, including the companies (their shareholders) themselves.

Most people get that lack of competition harms consumers. Canadians pay some of the highest prices for cell phone service because there are only a few competitors offering it, with not much incentive to lower prices or to improve service. (The recent comments by CEO of Telus, one of the large cell phone service providers, that welcomed foreign competition, offered a glimmer of hope to Canadian consumers for better service and lower prices. Now, if only the government 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. Therefore, Canadians pay more for air travel 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 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.

Companies 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. Competition leads to what economist Joseph Schumpeter called the “creative destruction” that drives innovation—and creates value both for consumers and for companies’ shareholders.

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

Competition has value, not only for companies and their customers, but also for individuals seeking employment. 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. You would like to get this job, but because of competition, you may not.

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 the best possible—the most productive—candidate. If only one person applied for any job the company offered, it could not hire the talent it needs to compete successfully.

Even if you do not get the job, competition is in your interest, assuming that the employer acts rationally and hires the most qualified candidate (and not the employer’s unqualified friend). It’s certainly disappointing not to 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, which makes the company more competitive. 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: 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 that restrict our freedom to trade and compete—and to flourish.

 

Originally posted 18 May 2013

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