Churn and change
When I first began to fly across the Atlantic, flights used to cost the same because the International Air Transport Association (IATA) was a price cartel. All airlines had to charge the same ticket prices. IATA even stipulated what the sandwiches on board could contain to prevent ‘unfair competition.’ All the major carriers were members, and prices were high. One minor carrier that did not join IATA was Loftleidir, as Icelandair was then known.
It involved a stop at Reykjavik on the way from London to New York, often changing from a short-haul aircraft to a larger one for the transatlantic leg. I flew it many times because its prices were much lower than those of the cartel. It provided some small competition, but the real threat to the cartel came when budget airlines such as Freddie Laker’s Skytrain and People’s Express stepped in. The established airlines fought them at every turn to maintain their monopoly, but the dam burst and prices tumbled.
Shops operated under something called Retail Price Maintenance (RPM) under which producers could specify the only price at which their goods could be sold. The price was often printed on the product because no-one was allowed to undercut it. A chocolate bar or a tin of beans sold at the same price everywhere.
One of the very few good things that Edward Heath did was, as President of the Board of Trade, to abolish RPM. In July 1964 the Resale Prices Act came into law, and this made resale price agreements against the public interest unless proven otherwise. The supermarkets stepped in with their economies of scale and bulk purchasing power, and shopping changed forever. Competition sent prices tumbling, and the average weekly cost of food, for example, kept falling as a percentage of average wages.
The introduction of television posed a threat to cinemas. The industry responded by adopting new techniques to improve its product. In came Cinemascope, VistaVision, Panavision and Todd-AO. Later came Cinerama and then IMAX. It was competition that elicited this response.
When Blockbuster entered the market, it gave viewers the chance to rent movies for home viewing and posed another threat to the cinemas. One response was to produce big-screen movies with special effects that gave the viewer a better experience than could be enjoyed on a small TV screen. When streaming came along with Netflix and the like, it consigned Blockbuster to the graveyard of innovations whose time has gone.
Competition has utterly transformed telecommunications after the state Post Office monopoly was ended. The same happened with deliveries when Amazon came along with an innovative service. Uber and Airbnb have each transformed their markets.
That is how competition works. It is Schumpeter’s creative destruction. Like evolution, it works by a selective death rate. It is not who owns the production, it is how easy it is for potential competitors to gain access to the market. Growth, productivity and innovation are driven by competition. Producers vie to satisfy the consumers, and those who do so survive, for a time, over those who do not.
One thing that competition ensures is change. It leads to a dynamic economy, just as its absence leads to a static one.