Business analysts are concerned with the actions of two groups of maximizers: companies and consumers. Companies look to maximize profit and production, while consumers aim to maximize what is derived from exchange. For any business, it is appropriate to focus on profit, as this relates to the overall efficacy of the organization and signals that the firm is generating value for the marketplace. For consumers, within advanced markets, the focus is two-fold: Consumption is based on both utility (need and function) and hedonic value (wants and desires). For example, I need to eat breakfast, but I want fresh ground coffee with yogurt and blueberries. I need a car to drive to work, but I want one that signals my status and personality style. Consumers have become accustomed to what would have been luxury items just a few decades ago, such as fresh fruit being available year round and car ownership now being commonplace (over 90 percent of the US population own at least one vehicle) thanks to advancements made possible by capitalism.
Needs and wants can be boundless for consumers, but firms, on the other hand, are limited by their assets and capacity. As such, innovation and expansion are primary means for maintaining competitiveness both domestically and abroad. By leveraging scale economies and spreading fixed costs over mass production, companies can lower operational costs and cater to a wider audience.
Firms can also engage in economies of scope, whereas resources and capabilities are harnessed for diversifying product offerings and appealing to new target markets. Take for example how the Dyson brand was first known for its innovative bagless vacuums, sold primarily to household users, only to later reverse its technology and sell commercial hand dryers to businesses. And, currently, Dyson is making its mark in the beauty sector with high-priced premium hair dryers.
Dyson’s differentiated offerings illustrate how a dynamic and advanced marketplace thrives when diversified interests and incentives are present. And this is an important point – consumers benefit from options and opportunities in the marketplace, not necessarily from competition. Dyson’s hair dryers aren’t competing with the standard types you’d buy at Walmart, and Dyson’s hand dryers aren’t really competing with other hand dryers, but rather paper towel use. Now this is not to say that competition in a market economy isn’t beneficial. When consumers desire variations of what is being offered (whether it be the product or price), competition is key. Competition challenges incumbent firms and incentivizes improvements, and this is clearly the case for Dyson as it must now vie with other brands for being the best cylinder floor cleaner despite being the first to pioneer the product.
Competition for competition’s sake, however, isn’t always necessary. For instance, if you’re wearing something that has a zipper on it, you’ll likely see YKK stamped on it. YKK is the world’s largest manufacturer of zippers, and it has been dominating the market for decades. Consumers do not care that there is only one primary zipper manufacturer, they only care that their zippers work. Thus, if market needs are being met, competition isn’t a concern. In fact, limited options may be proof of resources being allocated properly. Milton Friedman noted how it would be inefficient to have more than one telephone pole producer in each town.
Too many options can also create inefficiencies for consumers, as famously depicted in Barry Schwartz’s text The Paradox of Choice. It can even be argued that there is too much competition for certain items, as evidenced by grocery stores dedicating entire aisles to condiments and cereals. Although, it is nice to be able to opt for avocado-based mayo or chocolate-flavored Cheerios.
It should also be pointed out that companies facing little to no competition sometimes achieve this status by means of a Blue Ocean Strategy, a process in which businesses aim to generate their own isolated pool of profits. Blue Ocean Strategies were popularized in the early 2000s with a mindset to make competition irrelevant, and Cirque Du Soleil serves as an excellent example of such an approach. Cirque shows are not in direct competition with circus acts, dance theater companies, or Broadway shows, and yet performances encompass these elements and more.
Cirque Du Soleil launched in the 1980s as a touring act, and over the years its status has skyrocketed as it has expanded and evolved. The uniqueness and incomparability of Cirque allows it to set its own price levels and adjust performances according to audience types.
Cirque Du Soleil has monopoly status in that it stands alone in the industry sector it has established – but few would say that that is a bad thing. And, even if competitors never arise to match the likes of Cirque, it is also safe to say that Cirque’s premier status will not go on indefinitely since markets and interests do change over time. The Harlem Globetrotters prove this point having never faced a true rival since being founded in 1926. Although the Globetrotters continue to tour and delight audiences with comedic performances mixed with impressive basketball skills, the show’s notoriety has dwindled with time.
Just as the zipper replaced some uses for buttons, the dominance of incumbent firms is determined more so by relevance rather than competitiveness. In the end, consumers will choose best options, or only options, according to their interests and perceptions of value – and companies can either cater to existing needs and wants or create new ones. That is why capitalism is such a beautiful thing, and why the only time monopoly concerns should arise is when cronyism is involved. Similar to consumers and companies, congressional members also look to maximize their gains and, unfortunately, when they do, regulatory capture is likely and spillover benefits for the marketplace are rare.
Made available by the American Institute for Economic Research.