Competition

I just bumped into an interesting post in a pretty interesting blog today. You see economics is a favourite topic of mine for discussion. I can hear the in-drawn breaths, 'No way, and I thought he was such a nice guy too', you think. Well, we all have our dark secrets, mine is economics. It feels good to have finally got this off my chest.

Now Michael Higgins very eloquently puts up a case for competition being essential for quality to sustain. He is right. I can hear a few 'humpfs' there, why did you write this post then? you ask, well I've set my mind to play the devil's advocate in this deal and would like to highlight the pitfalls of competition.

We all I'm sure remember the time when we used to sweat it out in a line for over an hour to draw cash or take a demand draft in our neighbourhood bank. Or the time when we were very nice to the bank manager and wait for weeks so that he would give you a housing loan or a car loan. Now those days are gone. Modern competition is in. Cash can be drawn in an ATM under 10 minutes, DDs can be printed on the internet, any kind of a loan is available at your disposal. Now where is the problem?, you ask, the problem lies in the fact that the bank ceases to be a group of people you know and becomes a faceless system. It isn't such a big deal, you say, but when you consider that you are effectively reduced to an account number or a loan application number and cease to be a living breathing human being as far as the bank is concerned, you have to stop and think. You become a sales target for aggressive banks, more and more loans are poured your way and the number of credit cards that you carry in your wallet increase.

After a point you stop paying the entire amount due on your card to the bank and just keep servicing the outstanding by paying the interest. What follows is usually a default or two and the eventual blacklisting by all banks. You are a pariah, not just because you over spent, but because no one told you what a debt trap was. If it had been the old system, the bank manager would probably not have given you the loans (or credit cards) that you now have. You might have even saved a lot more money. Now imagine if an entire country does this. If you think that this is an extreme case, then do read about what happened in South Korea (you can read about it here too). This could very well happen in India as well, till the feeding frenzy of certain banks is held under control and the borrowers are educated. There certainly are some good banks that have a good system of credit appraisal that factors in issues like over spending on part of it's customers while processing loan applications but largely the process followed by most banks is shocking.

Small and profitable banks which quite frequently are able to offer more personalised services, have suffered due to intense competition and are being gobbled up by bigger banks who follow an acquisition route to growth as opposed to a more organic approach. So if you say that your bank is niche and different, the chances that it would soon be consolidated with something bigger is quiet high. For example well run banks like ANZ Grindlays and Times Bank were consolidated into much larger banks and in the end their customers suffered.

I am not going into stuff like phone banking and the machines that we speak to everyday when we call up our banks. These have become urban legends and are crosses that we bear in the name modernisation.

Now lets come to the other stuff. Do you remember the number of aerated drinks that were there before Coke or Pepsi came to India? Where have they all gone? Competition has wiped them out. They either have been bought over or have keeled under intense marketing pressure brought about by these two giants. So this effectively leaves these two biggies out in the middle to slug it out for market share. Like wise you can take a lot of examples in which the smaller players have been beaten out of the game by the larger players, eventually leaving 2-3 companies in serious competition.

This is a system called Oligopoly.

Oligopoly is a market form in which a small number of sellers dominate the market. In effect instead of one big fat company monopolising the market you have two or three big fat companies sharing the spread. Sure, they compete with each other but this competition is not a perfect competition (which a market where no producer or consumer has the power to influence the market and the market would broadly follow the laws of supply and demand). Sometimes, Oligopoly can easily lead to forming of cartels. It can also lead to a scenario where the buyer of goods not being very aware of the pricing mechanism or the quality of goods sold (Remember the contaminated ground water incident involving Coke and Pepsi, when these two giants came together for the first time). Oligopoly is even supported by the government in areas like telecom for reasons best known to them. Now, don't get me wrong, intense competition under Oligopoly means that the customers benefit but in the long term, this competition might have adverse impact on things like quality and product innovation. I can see a few economists shaking their heads to this but let me illustrate.

Now, lets take quality. Competition increases quality levels, yes. But to a point only. To compete, companies often have to cut costs. Cost cutting can come through a few things, increasing operational efficiency, cutting out unnecessary expenses, finding cheaper raw material and laying off staff. Now, there is a limit to how much a company can optimize, it would to a point, then it would study its product and find cheaper methods of producing this product. When they do, there is a good chance that these cheaper options may indeed affect quality. If you doubt that, then tell me how many times have you heard the words "they don't make them like they used to..". At times there is a collusion between companies in Oligopoly and reduction in quality ends up being universal. Even if that doesn't happen then in the least quality differences between brands is highly negligible, often advertising, brand recall and discount offers are reasons for purchase. 'Quality' is often a perception than a reality.

Many companies choose to increase their marketing budgets instead of increasing their infrastructure / product development expenditure as a way of fending off competition. So what you probably get is the same old stuff but in a glitz pack and a star studded ad campaign(eg The new and Improved XYZ detergent!). Companies, especially in the FMCG (or the Fast moving consumer goods) sector often would entirely outsource their product to a third party manufacturer and concentrate on advertising and brand building. This model as you maybe aware is actively followed by most American companies. It's not a bad model per se since it has given a big fillip to the Indian outsourcing and export industries which cater to these large brands. Unfortunately, the experience with these brands is that they loose their edge in product innovation as their primary focus is on marketing, packaging and delivery.

Now, so is competition bad? Not at all. Like I've said earlier competition is great, especially for the consumer, it gives more options often at cheaper cost. But I urge you to realise that competition in its true sense happens only when it beats out elements within that attack its very core.

How would this happen? It would happen if the consumer protection means wide spread consumer education and faster redressal of consumer grievances. It would happen if scenarios like oligopoly or monopoly are avoided and the government along with local authorities actively supports small companies in their growth and hence offering viable competition to the big bullies in the neighbourhood.

(I realise that this post leaves itself wide open for criticism and opposing views, this is by choice, I solicit your views. And my apologies to those I've thoroughly bored in this selfish endeavour. For those who don't know me, I'm a banker by profession and needless to say that these views are mine and not of any organisation )