Competition: A potent tool for Economic

development and Socio - Economic welfare

(Wordcount : 2702)

Ekta Grover ∗

Masters in Quantitative Economics,

Johann Wolfgang Goethe University,Frankfurt

29th June, 2012

Introduction

Competition, as in the words of Friedrich A. Hayek1 ”is essentially a process of the formation

of opinion: by spreading information, it creates that unity and coherence of the economic

system which we presuppose when we think of it as one market. It creates the views people

have about what is best and cheapest and it is because of it that people know at least as

much about possibilities and opportunities as they in fact do”.

It is therefore, as a by-product of this process of ”formation of opinion” ; and in an

attempt to achieve Economic efficiency which this process demands - that it filters out the

firms in the Business landscape of a country, thus creating sustainable, structural founda-

tions2 where Socio-Economic welfare of a society can prosper. According to a huge array

of academic literature3, for every job created in the organized sector, an average of 2.5 jobs

are created in the supporting unorganized sectors. This means that Competition not only

accelerates the growth in GDP, but also helps in creating social parity - something that can

be argued from both sides of the table. By having positive spillovers in the market forces of

demand-supply of labor, it necessitates trans-generational investment in the Human Capital

- thus facilitating a long term transition into high-income groups. Looking at the historical

trends of Competition in the developing countries, we see that competition brings with it an

∗ekta1007@gmail.com1Hayek Friedrich A.(reproduced, 2010), Mises Daily, ”The Meaning of Competition”2which I will systematically describe later in this essay3Steven J. Davis, John C. Haltiwanger, Scott Schuh,(1998) ”Job Creation and Destruction”, MIT Press

1

increased flow of technological knowhow and global best practices, which when assimilated in

the host-country’s benchmark practices, further strengthes the political sovereignty, thereby

creating a blue-print for a long term economic development.

However, with all its positive implications and spillovers on the overall the socio-economic

welfare, Competition can at the same time also create Social disruptions due to accelerated

commercialization4 especially in ”Virgin Markets”, markets that the West recognizes as the

Emerging and the Developing economies. This is particularly true of extractive and heavy

industries, and can have far reaching consequences for the indigenous firms, and the SME’s.

Competition, especially when it comes with an onslaught of an unprecedented dependence on

FDI, increases the dependency of a Host country on Foreign capital, and if unsustained, can

pose a great risk of ”Hard Landing”5 of the Economy - thus creating a need for sustainable

Business practices, Regulatory reform and need for Institutions such as CCI, which serve as

a vanguard for healthy-prospering markets.

The questions then is not about the ”Shades of Grey” that competition brings with it-

self, but the long held debate on the rule per se vs. rule of reason, which should be seen

as a manifestation of moral responsibility and a calculated judgement, philosophical if you

would - which is why we now agree on a international scale that Competition law is indeed

dynamic - and that merely promoting economic rivalry, or stifling monopolies is different

than promoting growth and consumer welfare in the economy.

In the rest of the essay, I will touch upon both sides of the competitive rivalry. Throughout

this essay, I will try to enunciate this ”thin line” between the efficiency and wherever possible

shall cite accepted Research evidence, Quantitative trends and Business cases to elaborate

my thoughts. I will link these ideas to the contemporary Business landscape in India in the

context of MNC’s, FDI and National Champions - making a case for an evolving competitive

landscape.

The benefits of competition in markets

The benefits of competition in markets are manyfold - all of which build on top of each

other, creating structural foundations which weave together what they couldn’t have other-

wise achieved when operating in ”Business silos”.

4OECD report,available at http://www.oecd.org/dataoecd/47/51/1959815.pdf5Wikipedia : Hard landing in the business cycle is an economy rapidly shifting from growth to slow-

growth to flat as it approaches a recession, usually caused by government attempts to slow down inflation.

2

Competition in markets gives more choice and a greater basket of services at the disposal

of the consumer - which brings the price-point down, thereby increasing the consumer sur-

plus. This forces the businesses to evolve their products and services in an attempt to stay on

the forefront of the competition. In the Indian context, this led to innovative in ways to serve

the consumer, and more product differentiation. Most of these innovations were borrowed

from the developed world, which helped increase social parity and advancements compared

to the West, while at the same time, tailoring the Indian-model with ”frugal innovation”.

This was especially true of the telecommunication sector, which adopted non-linear pricing

tariffs, value added services(VAS), and advanced services such as 3G and 4G - that by pro-

viding the basic infrastructure, further sparked innovation in other sectors, primarily mobile

Health care and Education - thus creating positive spillovers in seemingly unrelated sectors.

To increase the margins in cut-throat competition, some of the very competitive Indus-

tries/Sectors have gone so far to carve out a new customer base and market segmentation

- this is particularly true of Micro Finance and Micro Insurance sector, effectively bringing

services to the bottom of the pyramid who wouldn’t have been served otherwise. The Total

Microinsurance market in India is about $1.56 billion, with pensions for unorganized work-

force6 upto $2.5billion. Localised Community Based Health Insurance such as CBHI (Mi-

croInsurance, Health), Private-public partnerships such as ICICI Lombard and United India

Insurance (livestock insurance), Invest India MicroPension (IIMP), Agro advisory services &

Financial-Credit Risk Institutions such as BASIX and WRMS7 - are some of the major play-

ers that have helped scale up this micro-market. The good news is that Multinational players

such as Swiss-Re, ICICI, IFFCO-TOKIO are coming together in this competitive landscape

to achieve what had initially been an in-competitive state monopoly of LIC and UTI trust

India, thus fundamentally altering the business landscape and carving out a new segment in

the bottom of the pyramid. What’s more, the selling margins8 in India are lower compared

with other emerging markets by about 25% - which strengthens the socio-economic welfare

of the consumers at the bottom of the pyramid, while allowing for an all inclusive growth,

bolstering structural foundations of the social parity I mentioned earlier in the introduction.

Since competition forces the businesses to optimize what can be achieved with given fac-

tors of production this leads to allocative efficiency and highlights our resourcefulness and

love for frugal innovation, together as a nation.

6both statistics per year basis7Source: IFMR research - For credit linked products, market based financial institutions like corporate

banks and community based financial institutions like MFI-NGOs and co-operative banks are used as deliverypartners.

8Source: McKinsey(2010), India Pharma 2020 Propelling Access and Acceptance, Realizing True Po-tential

3

Having healthy competitive markets, when combined with strong founded respect for

innovation and Intellectual property, helps convey a robust image on a global landscape -

which helps in bringing more technologically intensive solutions and attracts international

research projects. This helps increase the productivity of the factors of production, the

capital and the labour, and in this process achieves dynamic and economic efficiency. To ex-

emplify, the Biotechnology, Contract Research and Pharmaceutical are some of the leading

sectors that have thrived on competition the markets - and evolved in many-fold dimen-

sions. For instance - in spite of many fundamental differences with the WTO negotiations,

India scaled up9 it’s efforts to comply with the TRIPS(Trade-Related Aspects of Intellec-

tual Property Rights) agreement in the WTO Doha round, with its Patents Amendment

Act, 2005 and implemented a product patent regime in the pharmaceutical sector. These

are positive developments that go hand in hand in grooming this ecosystem for the overall

public good of the citizens. Such developments, often coupled with competitive FDI poli-

cies have helped the developing and emerging countries have trans-generational change in

the business practices, labor skills and knowhow, thereby pushing the whole market, upward.

This is glaringly true of the Indian Miracle story - and its implications for the national

champions and the PSU’s since the economic liberalization of 1991. Competition, and in

some cases privatization which often comes along in an attempt to scale up and augment to

the Governmental and State institutions, is thus, guided by the goal of achieving economic

efficiency. If we believe in the efficiency of the markets to some extent, this process helps

create ”Public Good”, especially in sectors that are highly capital intensive, eg Petroleum

Exploration, Heavy Industries, Manufacturing, institutions for sustainable Human capital.

This creates a ”clustering effect” for other sectors that can build on these foundations, when

basic utilities and infrastructure are provided for.

Having more competition also ensures that the businesses pay competitive wages, and

invest in their skill sets and productivity-quotient. This, in turn increases there allocative

efficiency and social parity, and the GDP - but this has traditionally been true only of the

organized sector, and not so much of the unorganized sector. I will cover the other side of

the economic rivalry in the next section.

9Latha Jishnu: Policy of encirclement(2009), TRIPS and India, Rajdeep Joyeeta(2008)

4

Towards the concept of Workable Competition - when

does economic rivalry gets it wrong

While competition creates a positive spill over effect for the supporting unorganized sectors

- it comes with its shades of grey. Competitive industries usually create around itself the

hubs, or clusters of unorganized sectors. It is the lucrative promises of quality of life in

these hubs, that it can create social disruptions such as migration to high-potential cities,

something that has been particularly true of Mumbai, Bangalore and Gurgaon. With the

flocking of man-power, there is a race for the natural resources, which strains our environ-

ment. Often, this migration leads to a move of the workers to a more competitive sector,

especially if the barriers to learning these new-skills are low. Part of the story is a systematic

move into higher income groups, yet part of it is what would classify as unsustained growth.

Consider for example10, since 1970-71, the sectoral share of agriculture in the GDP has

declined consistently, while the share has raised consistently in the services and industry

sector. As I mentioned before, part of it was a planned move into higher income groups, yet

the agriculture sector in India poses a fundamental question, which is - whether competition

is a zero-sum game. Looking at the trends of the share of the agriculture in country’s GDP

we find11 that compared to 1950-51, with a share of 56.5% in the GDP, the share has declined

each year since. In 2007-08 it accounted for 18.51%, 2008-09, 16.4% and in 2009-10 making

up for a mere 15.7%. Putting it into perspective, this means that as of 2009-10, 58.2% of

our workforce adds to a mere 15.7% of the GDP. This calls for a dire need to innovate in

sectors, which makes up the back-end of the competition. In that sense, Competition begets

Competition - with competitive sectors getting a more than fair share of the Innovation and

Sectoral reforms than the Industry average. This is why the focus should not be only on the

”relevance of the markets”, and the ”abuse of dominant position”, but also to create a level

field for an all-inclusive growth - even if creating this level field, requires ”artificial nudges”12

in the ailing sectors. This necessitates that the fiscal policy and labor reform go hand in

hand, something that requires close contemporaneous monitoring of the macro-economic

trends.

Now I will focus on a more fundamental concern: Cut-throat competition in markets.

10Source: National Accounts Statistics 2010, Central Statistical Organization, Ministry of Statis-tics and Programme Implementation, Govt. of India ,High-Value Agriculture in India: PastTrends and Future Prospects Paul Sharma, Vijay and Jain,Dinesh (2011), IIMA, available at:http://iimahd.ernet.in/assets/snippets/workingpaperpdf/21442132562011-07-02.pdf

11CSO and Economic survey 2009-1012Social disruptions such as these, calls for a balance that must be adjusted quickly, thus creating a huge

dependence on subsidies for the un-competitive sectors that eat up the Government coffers. This is why wethese sectors need a nudge.

5

In an attempt to protect their own market positioning, cut-throat competition may also

lead to protectionism by the individual businesses. This leads to redundancy and duplica-

tion of effort, as the best practices or knowhow is not shared, and this disrupts the very

foundations of economic efficiency it intended to attain. This cut-throat competition in turn

may entice some businesses to adopt unfair practices13 to cut deals. Also in an attempt to

squeeze out margins in the value chain, the smaller players in the vertical value chain, may

be treated unfairly. Come to think of it, last year, the small sector farmers and retailers have

knocked down the entry of the big retailing giants such as Walmart. The resistance to the

FDI bill in the parliament, brings to the the light some of these concerns and the prospective

threats it poses requires that we take a deep look into them.

There are other compelling facets to the cut-throat competition. When the focus is in

surviving today, the Businesses may loose focus and this hurts long term investments into

Innovation. While Innovation is the primary guiding factor to capture larger market share,

if the ”squeezing out” motive of the firms dominates, coupled with threat of it’s existence -

this may hurt the Macroeconomic foundations and systematically push the economy towards

a hard landing. Or, consider the scenario where to beat cut-throat competition firms start

producing low quality cheap goods. If the quality of these products can not be discerned

by the consumer, this makes the consumer worse off. This is especially true of consumer

electronics, and FMCG sector - as the quality is discovered over time.

Thus, in what follows, I will support these views as thought experiments for achieving

three-fold efficiency - Economic, Allocative and Dynamic efficiency,14 and using three sec-

tors - Aviation, Manufacturing and Real estate exemplify these concerns I have raised above.

Before beginning the discursion, I will pose three hypothesis on what form of competi-

tion can and should be worked out. One, Workable competition works out only for an entire

competitive ecosystem. Two, the cluster of an uncompetitive and speculative industry when

interacting with a fairly competitive industry, raises dynamic bottlenecks which can only be

worked out by allowing for a robust ways of learning information15. Three, when the focus is

on surviving today, sometimes the firms loose focus on the long terms Innovation that should

drive the sector, as this is undesirable both from efficiency view-point and consumer interest.

13such as predatory pricing, anti-dumping, price fixing, agreements and abusing its dominant position14Judgement in Civil Appeal No. 7999 of 2010 pronounced on 9th September 201015something we will call ”price discoverability” - essentially feeling a uncompetitive pulse before it mani-

fests itself. This is important since it gives the businesses more time to adapt to changing conditions

6

The Aviation sector in India raises a fundamental question - If price reduction and com-

petition good for Consumer, should that be the only guiding force for dynamic markets and

can we assume that the markets take care of itself by adjusting its own cost structures,

driving innovation and bringing technologically intensive and sophisticated processes to ail

what continues to handicap the sector. A deeper look into the problems of the sector, is not

the goal of this discussion, rather than re-thinking the market dynamics and that there is

no One-size-fits-all concept, when it comes to competition. Though the aviation sectors has

undergone some very fundamental reforms and consolidation - there is a greater need for the

overall good and re-thinking frugal innovation.

On the other end of spectrum is a question - whether competition can actually bring the

prices down and whether it is good for the end-consumer. Consider Real estate sector - where

the players continue to get bigger and charge what is called ”vanity pricing” , or prestige

affect. The real estate thrives on intermediaries and in many cases, the property(which is

the ”good”) changes many hands till it reached the end-consumer. Coupled with speculative

pricing, and other capital inputs, such raw materials (cement, steel, land) and labor - this

calls for a deeper look into what form of competition can be worked - and needs a fresh out-

look on the many constraints it build on, for a workable competition. This also exemplifies

the social disruptions I mentioned about earlier.

The Manufacturing sector poses another question - Does growth necessarily imply inno-

vation, and by achieving economic efficiency, does it achieve dynamic efficiency. Exports of

manufactured goods in India accounted for 75% in comparison to exports of manufactured

goods all over the world, with the Indian sector valued at $7.6 billion and growing at a CAGR

of 47.2% from 2007 till 2012. Yet, it has not had key innovations compared to the other

nation. The productivity of the manufacturing industry16 in India is approximately one-fifth

of the productivity in the manufacturing industry of US and about half when compared to

South Korea and Taiwan. This demonstrates that dynamic efficiency cannot be worked out

in the absence of other factors that produce lasting change and that fundamental reforms

need to go hand-in-hand with Innovation.

In my opinion, these questions, give a balanced view on the shades of competition and

in what ways can it achieve economic efficiency, and socio-economic welfare.

16EconomyWatch(2010), ”Manufacturing Industry in India”

7

Conclusion - Competition begets Competition

Competition in an economy, though desirable is a conflicting goal - which is why we should

apply it with reason. In the introduction, I mentioned how important it is to develop the

rule of reason. To conclude, I envision that the Research Institutions & Think tanks, Reg-

ulatory bodies such as CCI and Policy vanguards will come together to implement research

backed recommendations that would allow this lubricant to function well, allowing for an all

inclusive growth.

Bibliography

Arora, Ashish, Arunachalam,V.S., Asundi,Jai and Fernandes, Ronald(2001) ”The Indian

software services industry” , Elsevier Research Policy Volume 30, Issue 8, October 2001, pp.

1267-1287

Clark JM, (1940) ”Toward a Concept of Workable Competition”, The American Eco-

nomic Review Vol. 30, No. 2, Part 1, pp. 241–256

Bhaumik,Sumon Kumar and Dimovad, Ralitza(2004), ”How important is ownership in a

market with level playing field?: The Indian banking sector revisited”, Elsevier, Journal of

Comparative Economics Volume 32, Issue 1, March 2004, pp. 165–180

Dhall, Vinod(2007), ”Essays on Competition Law and Policy” available at: http://cci.gov.in/

(accessed 09.06.2012)

Manupatra, Quarterly Journal on Competition Law Reports (April-June, 2010)

PriceWaterCoopers, India(2011), ”Connect with Consumers, Value Added Services: The

Next Wave India”

Sharma, Anupama, ”Livestock Insurance: Lessons from the Indian Experience”, Insti-

tute for Financial Management and Research Centre for Insurance and Risk Management

8