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Unfair Competition

I'd like to say a few words about "unfair" competition. This is actually not an article about antitrust law (surprise!) but instead about business practices that are quite ordinary.

Imagine you own a gas station. You're competing with all the other nearby gas stations, and because you're selling a commodity to a disloyal customer base who only cares about price, your prices are very close to your competitors'. Customers regularly accuse you of collusion and politicians keep threatening to investigate your industry. You wish people weren't so self-righteously ignorant but you have the grace and patience to endure the situation until the world realizes that studying economics is cool and sexy.

Let's further imagine that things have been fairly stable for a while and you're making a reasonable living from your half penny per gallon (or whatever) of profit. Once in a while a new gas station will open up or an existing one will close down, but there are no significant changes … until one day when a different sort of competitor opens up across the street from you.

This new competitor is a grocery store that also sells gasoline. You've known for a long time that people often want to pick up snacks when they buy gas, which is why you have a convenience store at your gas station. But you only have room to stock a few items and these sales don't account for a large percentage of your revenue.

You can't match the grocery store's offerings. It has much more space and many more products. They offer everything you do, and more. Given a choice between gasoline and a few snacks, or gasoline and a complete grocery store, your customers will choose the grocery store. As a result, your business is in trouble. Is this unfair?

The competing store operates its food business on a much larger scale. It enjoys economies of scale and is able to lower prices and still be profitable. Your costs are higher and you would not be profitable if you matched their prices. Now your customers get a greater selection and lower prices by switching to your competitor. Is this unfair?

Let's assume your competitor realizes that the gasoline business isn't very profitable by itself, but that lots of people who buy gasoline also buy a few groceries. They decide to lower their gasoline prices in order to draw more customers into their grocery store. Now they're only breaking even on gasoline, but more than making up for it through increased grocery purchases. You can't match their gasoline price reductions because you need to operate at a profit. Is this unfair?

And what if they sold gasoline at a loss, making them consistently the cheapest place to buy gasoline in town? They're subsidizing their gasoline business with their grocery business. If you met their price reductions you would be operating at a loss, and so would all the other regular gasoline stations in town. Is this unfair?

What if your competitor is financed by an eccentric billionaire who decides he'd like to give away all his wealth in the form of half-price food and gasoline? Your competitor lowers prices to such an extent that you cannot possibly be profitable. Is this unfair?

What if, instead of an eccentric billionaire, your competitor is a foreign company and receives large subsidies from a foreign government? Does this change anything in the analysis? Is this unfair?


At what point do you decide that "unfair" competition ought to be prevented by government intervention? What form would the intervention take? What would happen to you, to your competitor, and to the customers?

I'll revisit this topic in about a week. I'm inviting you to e-mail me if you have thoughts about this; I'll publish the most thought-provoking letters.

Tiny Island