When is too much competition a bad thing?

[Darth Wong]

Proposal: that competition increases efficiency through the so-called "invisible hand" of Adam Smith's economic theories, but excessive competition creates consumer confusion and weakens this effect.

Argument: that the product of the number of competitors and the amount of time an individual consumer can spend researching these competitors is roughly fixed. Therefore, an increased number of competitors can weaken the "invisible hand" effect by forcing consumers to do only the most superficial research on individual competitors, hence his decisions are more randomized, or perhaps driven almost entirely by advertising. In this environment, companies offering inferior value for money can actually dominate if they have sufficient advertising clout and/or willingness to deceive the consumer.

Note 1: many companies offer multiple brand names under the same manufacturing umbrella, perhaps because they are aware of this effect and know that a profusion of meaningless pseudo-competitors will further confuse the consumer and make him more susceptible to deceptive advertising. One is often surprised to discover that two competing "brands" are actually owned by the same parent company.

Note 2: this effect is magnified if the product in question is highly complex, thus requiring considerable research before purchase.

Thoughts?

[Admiral Valdemar]

Well, while I agree with the obvious conclusion that more competition can equal better choice and higher standards but also lead to confusion and playing the market, I will add that there are people that help out here. Magazines like Which? for instance help trawl through practically every possible consumer product or service there is and, like a peer-reviewed journal, assess which company is providing what it says on the tin, as it were, and which is simply giving you bullshit. It costs you, though if you really want to know what the best DVD recorder is for your money or which insurance broker you should get for your house is, they help.

The competing brands thing can be odd too. Here, the electronics companies PC World, Dixons, Currys and The Link all sell hardware and software for either computers, TVs, mobiles and so on. Yet, they are all owned by DSG International (another example is GAME owning Electronics Boutique until recently). In one street alone in a nearby town, there is a Dixons which is across the road from... a Dixons The Link. Both sell mobile phones, and I saw one unit on one network cheaper in one shop than the other. This kind of thing (aside from saturating the high-street) can get frustrating as I nearly spent a tenner more on my phone than I needed tofrom the same damn company. I think there should be more gov't regulations on this kind of behaviour. If a subsidiary of a larger group is price-fixing and certain chains are found in proximity to one another in a town centre to influence the crowds, then action should be taken.

[SPOOFE]

My immediate thought is that a market with a broad spectrum of competing products would foster a greater amount of parity between the leading brands. Think of products like Mp3 players and LCD monitors... both commonly use parts (the important parts, anyway, like the storage medium or the actual screen itself, respectively) that come from the same manufacturer (for instance, Samsung manufactures the flash memory for many Mp3 players, including its own). Similarly, Sony made digicam CCD's that many of their competitors licensed and used. There are still differences between the products, but many of the key features are the same.

Of course, these facts are never communicated to the consumer, at least not through the company. Olympus would never say (hypothetically), "We're using a Sony sensor, so you can trust our brand!" because that would make people want to just get a Sony camera.

My view is that the "invisible hand" idea works on large scales, five, ten, twenty years or so. It's entirely possible that a company with inferior products can dominate a market, but only for so long.... it just takes longer to instill an awareness of quality (or lack thereof) in the consumer. But once that image is established, that company is screwed.

[Middleclass]

It certainly could be happening, but is also certainly (at least partially) mitigated by the previously mentioned Consumer Reports style magazines. The question is: does the larger number of competitors raise the level of confusion faster than the magazines and their ilk reduce it?

Past that, you would also need to explain why various free-market forces are not decreasing confusion on their own. Increasing confusion is fine if your product is inferior, but if it is superior then you really want to decrease the confusion. Is this happening? How do the trickster companies avoid bad word-of-mouth? How do the honest, superior product companies avoid good word of mouth?

These are secondary considerations, however. You are saying, if I understand correctly, "Assuming the general level of confusion is increasing, could increased competition be causing the confusion?" The first step would be firmly establishing that the confusion is increasing. This would be a difficult task, and I have only the slightest idea as to what methodology could be used. The answer probably lies in the arcana of population statistics.

You also need to account for other possible explainations for the increase in confusion, if it is happeneing. One off the top of my head would be that in ages past, households had dedicated shoppers: wives. Now that women have entered the workplace, they (and their husbands) have less time to dedicate to shopping, which would naturally lead to less informed shopping.

[Darth Wong]

It certainly could be happening, but is also certainly (at least partially) mitigated by the previously mentioned Consumer Reports style magazines. The question is: does the larger number of competitors raise the level of confusion faster than the magazines and their ilk reduce it?

Another question is whether Consumer Reports truly helps. I've discovered that when you talk to people who are very knowledgeable about any given field, they are often quite disgusted at Consumer Reports' treatment of it. One field I'm fairly familiar with is loudspeakers, and Consumer Reports' treatment of loudspeakers is an utterly laughable joke. They rate Bose very highly, despite the fact that people have actually dismantled Bose speakers and found that they use the absolute cheapest possible construction materials, and then try to compensate with electronic EQ.

Past that, you would also need to explain why various free-market forces are not decreasing confusion on their own. Increasing confusion is fine if your product is inferior, but if it is superior then you really want to decrease the confusion. Is this happening? How do the trickster companies avoid bad word-of-mouth? How do the honest, superior product companies avoid good word of mouth?

I don't think word of mouth really works all that well any more. Society is too big, too disconnected. We get most of our information through the media, so if you control the media, you control the information people are getting. To revisit the Bose example, even the most cursory web search reveals that people everywhere are spreading a great deal of very negative and nasty word of mouth about Bose, but it's not making a dent in Bose sales because their advertising budget exceeds the rest of the loudspeaker industry combined.

And if you spend enormous amounts of money on advertising, you're going to pass those costs onto the consumer so it's quite likely that you'll be offering inferior value for money compared to someone who makes a high quality product but doesn't spend much on advertising. Particularly if the goal is to achieve "saturation advertising" where people see so many of your ads that they instinctively associate your market with your brand. Advertising costs (particularly TV advertising costs) are ridiculously high in some cases.

These are secondary considerations, however. You are saying, if I understand correctly, "Assuming the general level of confusion is increasing, could increased competition be causing the confusion?" The first step would be firmly establishing that the confusion is increasing. This would be a difficult task, and I have only the slightest idea as to what methodology could be used. The answer probably lies in the arcana of population statistics.

You also need to account for other possible explainations for the increase in confusion, if it is happeneing. One off the top of my head would be that in ages past, households had dedicated shoppers: wives. Now that women have entered the workplace, they (and their husbands) have less time to dedicate to shopping, which would naturally lead to less informed shopping.

Agreed; it would be a difficult thing to objectively analyze. It's just an idea that I've been kicking around.

[Mr Bean]

A note about the above.
Consumer Reports does some things goods.

Those things of course it started out doing. IE Cars, Homewares. things like Washingmachines and the ilk.

Since the maginze seeks to cover anything and everything its quality of reporting varies by department to department. This is also true of its competing products.


Thus infact one can say you must increase the research as well for mag's because they themselves increase the confusion. Except for some specialist mag's they are rarley right.

[SPOOFE]

And if you spend enormous amounts of money on advertising, you're going to pass those costs onto the consumer so it's quite likely that you'll be offering inferior value for money compared to someone who makes a high quality product but doesn't spend much on advertising.

A good example of this would be Intel vs. AMD... for the past couple years, Intel's chips have widely been considered inferior by the informed consumers, cost more, yet Intel still has the bigger market share. This could be attributed to more aggressive marketing and advertisement... it could also be attributed to improper business activities, as AMD claims.

I do also note an irony of that example coming from a field with FEW competitors (or at least few competitors that the average consumer would know about), as opposed to a cluttered marketplace. But it does go along with the idea of complicated products confusing the consumer... really, how many people will know that a 2 ghz Athlon64 will outperform a 3 ghz Pentium 4?

[Alan Bolte]

Agreed entirely. This can only go on for so long if the difference is significant: word-of-mouth will eventually drive business toward the better deal despite advertising, except perhaps in the more complex cases. If, however, the market in question changes faster than word can get around, this equalizing force is irrelevent. Note the term significant: as you argue, advertising can oppose this effect, so a product will have to be quite inferior to fail with an otherwise successful saturation advertising campaign. The most complex products would have to be junk to fail, unless competitors counter-advertise.

Megacorporations that feign competition between brands that they own are the natural result of anti-trust laws minimizing the possibility of price fixing on a large scale between unrelated companies. A highly localized strategy seems to have been widely adopted, as AV notes. Cheaters do prosper.

[tharkûn]

Argument: that the product of the number of competitors and the amount of time an individual consumer can spend researching these competitors is roughly fixed. Therefore, an increased number of competitors can weaken the "invisible hand" effect by forcing consumers to do only the most superficial research on individual competitors, hence his decisions are more randomized, or perhaps driven almost entirely by advertising. In this environment, companies offering inferior value for money can actually dominate if they have sufficient advertising clout and/or willingness to deceive the consumer.

When people don't have sufficient knowledge to judge quality then the values of price and convenience in purchasing decisions becomes inflated. Rather than offer an inferior product at equal price, you offer an inferior product at a reduced price. Given a population that cannot tell the difference you don't just split the market with your competition, you drive them out.

Confusion simply reduces the old triad of "better, faster, or cheaper" to just "cheaper or faster". When the public cannot observe a subjective difference in quality, does it matter if the public gets inferior quality?

Particularly if the goal is to achieve "saturation advertising" where people see so many of your ads that they instinctively associate your market with your brand. Advertising costs (particularly TV advertising costs) are ridiculously high in some cases.

Competition works against you here. Saturation advertising becomes increasingly costly the more competition you have. The more other sources of "signal" you have, the harder it is to drown them out with noise.

Interesting proposition though.

[Middleclass]

I do also note an irony of that example coming from a field with FEW competitors (or at least few competitors that the average consumer would know about), as opposed to a cluttered marketplace.

This is an excellent point. It seems that the primary examples are single firm dominated oligopolies, rather than a wide variety of producers confusing the consumer.

Society is too big, too disconnected. We get most of our information through the media, so if you control the media, you control the information people are getting. To revisit the Bose example, even the most cursory web search reveals that people everywhere are spreading a great deal of very negative and nasty word of mouth about Bose, but it's not making a dent in Bose sales because their advertising budget exceeds the rest of the loudspeaker industry combined.

Firstly, society is big, but hardly disconnected. If even a cursory search reveals lots of bad word-of-mouth, then the only people who are duped are people who put no effort into research at all. Personally, I don't feel a lot of empathy for people who make large purchases without even attempting to get information. However, as you point out, companies like Bose dominate their respective markets. This seems, when the internet is taken into account, that there is a problem with consumer laziness, rather than overcompetition. Surely, if the market in general is so lazy that they won't research major purchases past the ads from the producers, then the jerk with the biggest ad budget wins. The information is there and easily accessible. The problem is that people aren't looking for it.