The Race to the Bottom

Once we stop assuming that competition is always beneficial, we will start seeing toxic competition all around us, and we’ll have a better understanding of why companies seek to improve their relative competitive position by behaving unethically or misleading consumers—why competition can sometimes encourage companies to invest less in legal compliance, pay kickbacks to secure business, underreport profits to avoid taxes, and manipulate the ordering protocols on liver transplants.

Competition is good, they tell us. Not always, we must learn to reply. Competition turns toxic under the following conditions:

  1. Suppliers face increasing costs at the same time that there is intense competitive pressure to lower price.
  2. With diminishing profits and mounting losses, some suppliers will choose the path of least resistance to survive, looking for any and all weak bolts in the machine. One such path is to reduce costs. Having bought cheaper materials to lower their costs, they sell the lower-quality product under the same brand name as before.
  3. Consumers, contrary to their expectations, do not in fact notice this degradation. They continue to assume that the competition machine works. In fact, since their own wages are squeezed and their work benefits have been pared, they are delighted when the retailer lowers the price for the beef lasagna. Similarly, the retailers themselves often remain unaware of the degradation as they lack appropriate monitoring tools and quality controls.
  4. Finally it’s difficult and costly for others to convey to consumers the quality differences in goods and services that might prompt consumers to switch. Supermarkets do not regularly test their beef lasagna, much less that of their rivals. They, too, assume that the competition machine is working. Just as consumers have expectations about retailers, the retailers have expectations about their suppliers. Surely no meat seller would jeopardize its relationship with a buyer by adding horsemeat to its beef products.

Under these four conditions, we can see how intense competition, loose quality controls, and limited consumer ability to detect the quality erosion create a toxic mix. It may take a surprisingly long time before we see the competition machine explode.

 

Exploiting Human Weakness

On paper, competition works well. Assuming that we generally know what serves our own interest, and that we have the time, judgment, mental energy, and willpower to ensure that we get it, competition can indeed deliver what we want at a fair price.

However, in the real world, few if any of us are perfectly rational. Suppose Lavazza and illy coffee are both on sale at your local supermarket. For both, the standard price per pound is $9.00. However, right now illy is offering a discount of 33 percent on its one-pound bag, bringing the price down to $6.00. Lavazza hasn’t lowered its price, but is offering 1.33 pounds for $9.00. Assuming you like both brands equally, which option is better—a 33 percent reduction in price, or a 33 percent increase in quantity? Or are they the same?

Most shoppers generally opt for the 33 percent extra, the Wall Street Journal reported, even though the discount is the better option. For the two deals to break even, the price discount of 33 percent would have to be matched by an offer of 50 percent more quantity, not 33 percent.

Now put yourself in the seller’s position. Why offer the better bargain (33 percent off) when many would choose the inferior option (33 percent more coffee)? Why offer a steep discount, when you can entice more consumers by discounting the items twice?

Many consumers rely on intuition rather than deliberative reasoning. They succumb to the temptations of instant gratification, misjudge the strength of their willpower, and overestimate their ability to detect manipulation and exploitation. Firms know how to identify and exploit these customers’ weaknesses.

 

Choice Overload

We like choice. We think it’s great to have many choices. But, at times, we can overdose from too many choices brought about by too much competition. Competition becomes our blind spot. What happens when we have too many choices is that we get confused and then become inhibited about making choices. Or we experience buyer’s remorse.

Rather than giving us fewer choices, sellers can actively exploit our confusion by offering too many choices and then helping us narrow them down in ways that are ultimately to their own benefit, not ours. But we can’t blame retailers or manufacturers for increasing the variety or complexity of the product’s features—that’s competition.

Thus, we should be grateful when Alexa makes recommendations. She cannot be blamed when she steers us to higher-margin products—because we could always choose something else. We have the freedom to choose.

 

From Toxic to Noble

Today, there are many different kinds of competition, some clearly healthier than others. To assess where a given form of competition falls on this continuum, we suggest asking two basic questions.

  1. To what extent does the competition actually serve us collectively, rather than force us to serve it? If we believe that the primary end of government is to enhance the well-being of its citizens, then we should also expect competition to promote our collective well-being.
  2. To what extent can we compete without sacrificing our values and our integrity? The race to the top may be fierce, but should not override our humanity. Ideally, it should bring out the best in us, not the worst. This means that any form of competition should be informed by our moral, ethical, and societal values.

In applying these criteria, we can rank four kinds of competition on a continuum:

  • On the lowest end, there’s toxic competition which must be always avoided.
  • Zero-sum competition may not always serve us or society (especially when it’s a policy maker who is profiting), and it often requires us to disregard or outright violate our standards of fairness and morality. Sometimes, however, there is no other choice, and this is the only feasible competition to allocate limited resources.
  • At other times, however, when we have a choice, we should opt for positive-sum, ethical competition, which we have described earlier as a way of expanding the pie, so that most, if not everyone, benefits.
  • And finally, at the opposite end of the continuum is the ideal form of competition.
What’s A Noble Competition?

Noble competition is helping your rivals reach their full potential. Players compete fiercely, but do so with deep societal and moral awareness. Each player, while seeking to prevail, is aware of her wider community and recognizes how her competitiveness can help her rivals be their best selves.

Imagine you have twins who compete in the same sport—let’s say tennis. You would not wish one child to thrash or humiliate the other. Nor would you encourage a “win-at-all-costs” attitude. Instead, the athletic competition, if properly designed and overseen, would help build both children’s character and make both of them feel good about themselves—and each other.

No matter which child prevails in the tennis match, the rivalry will have catalyzed levels of effort and execution that neither child would have been capable of without that spur. The reward, then, isn’t just in being acclaimed the winner; the reward also comes from the self-improvement and the camaraderie that result from the rivalry. Seen in this light, noble competition, in encompassing both self-mastery and cooperation, reduces the incentive to behave unethically.


 

Categories: Business

Kyaw Wai Yan Tun

Hi, I'm Wai Yan. I love designing visuals and writing insightful articles online. I see it as my way of making the world a more beautiful and insightful place.