is a competitive market the answer?
Saturday, June 6, 2009 at 8:46PM Over the course of the last week there has been an interesting case study in the dynamics of a competitive market which has got me thinking about our fundemental belief that competition drives efficiency in markets.
Loosely speaking the best result for the consumer can be achieved if the market is competitive and these competitive forces play out in the form of cheaper product and higher levels of innovation.
So, in light of this 2 things grabbed my attention last week in Australia.
There was an article in the Queensland Courier Mail covering how electricity prices are to rise despite the recent deregulation which was expected to bring lower prices driven by competition. Interesting the article's opening sentence was
...The average annual power bill in Queensland is set to rise about $300 after a decision by the Competition Authority to recommend a 15 per cent price spike.
I'm sorry, the price is set to go up after a decision by the Competition Authority?
Anyway, moving on. Also this week Australia's two mining heavyweights decided to team up, share, collaborate.. whatever you want to call it by announcing an iron joint venture the result of which would create some 10Bn worth of efficiency in their now joint operation.
So let's compare these 2 items.
Create competition and prices go up
Enable co-operation and share prices go up (BHP and RIO both went up over 8% on the day)
So why? Well, I can only postulate that margins (read: profit) are reduced in a competitive market however that players within this market are forced to price higher to ensure adequate/comparable returns.
In other words, this market "efficiency" actually causes individual inefficiency by players who outspend each other on marketing, sales, distribution and product development in the name of product differentiation NOT true value add.
And who loses... well, everyone loses the way I see it.
Consumers: end up paying more and not recieving true product enhancement
Companies: have their margins eaten into by pointless competitive activity
Workers: being the cost side of the equation are targeted to make up the difference
Progress: Our resources are lost to competitive endevaour not collaborative gain
Today's post was not ever about having the answer but simply asking the question?
is a competitive market the answer?
competition collaboration in Innovation 
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Reader Comments (3)
Dear Vinae,
The electricity stuff is a bit of a sham. It would be way better if the NSW gov just held the electricity assets, they own generation units, network and retail. Before the market opened there was no retail unit, everyone was charged the same price, a low price in NSW. Customers then paid for generation, network and a premium tax if you will. No advertising costs, no $96m computer software sorting out individuals bills for Sydney.
Main problem is that since opening it up to competition they have split all the assets up. Network will always remain government. But generation and retail need to be vertically aligned.
Retail customers have 2 options,
1
purchase electricity at iPART set rate.. Independent board setting the rate. (this is what everyone use to pay before competition)
2
Purchase a contract. Get a discount off the iPART rate, for generally a 3 year contract.
Retail buy wholesale electricity on the market from a range of generators. Cost of generators has gone up.
Reason California is bankrupt is due to the spot price of electricity on the US market skyrocketed and the Terminator had to buy and supply the electricity. They are not vertically aligned. Pretty important or the generators can hold you ranson when the time comes.
Electricity prices are going up, but might be a good thing for solar and the globe. I think it would be better to hold electricity under the state gov and no competition but this may be the only exception.
As I understand the BHP and Rio have a lot of synergies. Extracting minerals more efficiently sounds pretty good to me.
Yo... Just heard CSIRO has come up with a new way of producing solar panels for less than a quarter of the current costs.
Also someone not sure who, but they have come up with a film that on one side photo vitalic produces electricity and on the other side hotwater for the house.
Hopefully these new technology advances get to the market quickly since the government is reigning back the rebate. Not means tested but less rebate.
As wish washy as it sounds I suppose the answer lies somewhere in the middle? Mans rapid rise to superiority was founded on our ability to collaborate. Thus affording us the chance to enhance via specialisation and then receive what we lacked through a process of exchange. However this alone is not enough. Yes collaboration can lead to advancement & efficiency but competition too has a part to play. For without competition the prices again begin to rise & production falls without the threat of any impending reprisal from a superior rival.
The question that then arises, can regulation step in and play this part of competition to ensure that this inevitable "drop off" doesn’t occur? A possibility in part but only to maintain the status quo of the day, efficiency would surely begin to falter without any competitive incentive to innovate.
However on further contemplation might this only be applicable for general commerce? Are utilities & resources an exception to the competitive rule? By nature they are limited in supply and opportunities for innovation & efficiency are limited at best. Thus should not one collaborative organisation regulated by the government provide these produce to optimise output & cost? Maybe? Well that is what my hole ridden thoughts have led me to conclude.
Geez Vin you certainly know insight thought. I now haven’t the foggiest. Great topic!!!