The Essence of Competition

Competition, or vying for superiority, exists in nature in one form or another. Throughout most of history people lived, by today’s standards, under conditions of crippled competition. At best, they involved overly constrained relationships in production (slavery, serfdom, guilds, privileges, and the like). At worst, they implied wars. Any contest for superiority was based either on harsh coercion and constraints or on denial of individual freedom.
The modern concept of competition was born with the rise of the classical school of economics. It was then that such phenomena as division of labour and competition were brought up and acknowledged. It was conceded that peace and well-being depend on the recognition of these natural principles of community life. From that time onwards competition has been regarded as a civil contest over customers’ favours and a driving force behind progress and growth. Obviously, peaceful competition, just like co-operation, reduces the likelihood of other, military ways of contest.
This apprehension marked a watershed in economic thought. Since that time anti-competitive ideas have seldom prevailed in any society. Even if they did, the orders that were based on them eventually turned out a complete fiasco (the building of socialism in the Soviet Union and elsewhere).
It is obvious that producers should be free to manufacture and to sell. Likewise, buyers should have a free choice to buy or not to. In practice, however, the understanding is often different. Placing producers under an obligation to sell their goods at a fixed price, for example, may be viewed as an infringement of ownership rights. On the other hand, prohibitions against fixing prices may be regarded as an encroachment on freedom of contracts.
Three Concepts of Competition
There are two prevailing concepts of competition, European and American. In both cases, the primary concern is to achieve a multitude of buyers and sellers on the market. Both the doctrines concur in that freedom of contracts may be constrained in pursuit of such a system. Given that, the real distinction between different approaches to competition lies elsewhere. A third doctrine, one that has been subdued by the prevailing views, holds that the essence of competition is not in the actual number of sellers but in a free market entry. It opposes any restraints imposed on freedom of contracts in order to better market conditions.
The main target of the dominating concepts is to outlaw agreements restricting competition and any abuse of a dominant position. In addition, they promote control and stress the need to secure “fair” competition. To achieve that, however, it is necessary to constrain freedom one way or another, rejecting freedom of contracts as the key value which must be protected by law in general and competition law in particular.
The doctrines at issue are beneficial to those who are neither leaders nor winners on the market. They are also convenient for those wishing to enter the market but having no special innovations to offer. Their tenets find a ready audience among those who are on good terms with the government, the only institution enjoying the “right” to disobey the principles of competition. Yet, these doctrines discriminate against the bulk of participants in the competitive battle. The first to lose are leaders who have best served the consumer, provided the government has refrained from imposing restrictions on competition.
Competition law based on the said concepts has even more defects. For one thing, regulation of market relationships is invariably complicated and bureaucratic. Second, the system of norms is contradictory in itself. The wish to adhere to flawed principles leads to absurdities, which, in turn, result in making exceptions. The description of such exceptions becomes, in terms of content and space, more important than the establishment of basic norms themselves.
Third, some prohibitions are totally unjustified and acceptable only for some societies. A newly drafted law on competition in Lithuania affords a good example. It outlaws the recommending of sales prices, even though this is a normal practice in the whole business world.
Fourth, efforts to restrain market leaders ultimately harms consumers. As operational conditions are worsened, coercive contests over prices eliminate a more extensive competition whereby new alternatives are offered to existing products.
Finally, competition rules are extrinsic to human nature. They are not understood as naturally fair and righteous. They are known inasmuch as they are imposed by law. Such rules are never too effective and are often dodged, thus destroying harmony in the system of social norms.
One should remember, however, that even the position of evident leaders is rather uncertain on the market, as the development of new technologies keeps furnishing new means to achieve the same ends. For instance, a monopoly position in the post market is worthless if there exist such mediums of communication as telephone or e-mail. The railway can enjoy a monopoly provided there are no buses, airplanes or private cars.
Barriers to Competition
Whichever competition doctrine we choose to follow, we have to recognise that the main idea behind them is basically the same, to create conditions conducive to competition. Obviously, a free market entry unfettered by state-dispensed privileges is an essential condition of competition. This factor is in most cases hampered by licenses, tax barriers (customs and stamp duties), state aid, concentration of demand in government, and petty standards, which oust from the market not poor-quality goods but incompatible ones.
These evils are the main cause for concern. Only then come unfair agreements between undertakings. At this point it should be mentioned that when speaking about agreements, one essential distinction is overlooked: Some agreements are forced upon others, while others are not. No doubt, it is the first group that involves most danger.
Efforts to protect competition should be prioritised, too. They should be targeted first and foremost at fighting government-imposed restrictions. Forced contracts should be the next cause of concern. Voluntary agreements should come last. In reality, however, it’s quite the reverse. The severest, government-imposed restraints on competition are hard to deal with. It seems, on the one hand, that for these constraints to be removed, the state should simply stop interfering. On the other hand, the state is quite reluctant to give up its powers, which results in necessary decisions being either postponed or never taken. Often as not, we even witness examples to the contrary, when the state expands its authority, violating the tenets of competition. Take the Telecom’s monopoly, an increase in import duties or new corporate welfare programmes. Under such circumstances, fighting the infringements of competition on the part of the state is the most pressing and challenging of all tasks.
Where a Solution lies
The above considerations point to the conclusion that it is necessary to lift restrictions imposed on businesses and to curb both private and government’s coercive interventions in the market. While tackling private coercion is more or less effective, state coercion, or private agreements based on such coercion, are much harder to combat. The efforts to create conditions for unfettered competition must be coherent and unvaried. The pursuit of this aim should be based on strict adherence to general principles applicable to both businesses and government.
The fundamental principles may be the following: (i) no one may use force to influence the behaviour of market participants; (ii) no one may obstruct market entry or exit; and (iii) no one may restrict the market technologically (through mandatory standards).
The said principles may be supplemented by provisions prohibiting abuse on the part of subjects with the largest power or with the monopoly of law or compulsion (the state ranks first in this respect). Such provisions may be: (i) to prohibit such institutions from dispensing aid and privileges; and (ii) to prohibit those who set, and supervise adherence to, the rules of the game from participating in business affairs.
Choosing the Right Path
The issues raised in this article are generally applicable to Lithuania and the EU or other states alike. Still, differences between Lithuania and the EU do exist in this domain. The new law on competition should have been designed to eliminate these differences. Replacing competition rules is instrumental not only because of the current needs of the state but also because of its aspirations to integrate into the EU.
If we admit that EU regulations have failed to take the most rational form, or the most suitable for Lithuania, there will be two alternative options. One of them, a more coherent one, is to remain a free market islet. The other, a more moderate, approach would be to use all possible liberties within the EU and to deviate as little as possible from free market principles.
The current state of affairs suggests that we have not made a decision yet. Private entities in Lithuania face a range of excessive controls, which also appear to be more stringent than recommended by the EU. Admittedly, we have also witnessed some commitment to placing restrictions on the state, restrictions that would help solve the main problems confronting competition. Although there are no signs of haste in implementing the latter, let us hope that the wish is there and the day will come when it gets results.
* The new Law on Competition was passed in February 1998.