Free Market Economy and Competition

The pros and cons

Does the Free Market Economy offer benefits?  Yes.  Can it also be detrimental?  Again, yes.  We're going to explain how, starting, as we often do, with a definition.

Definition: A free market economy is one in which is unregulated.  In other words, the government has no say in the market except to enforce contract laws and rights of ownership.  It is the opposite of a controlled market, in which the state directly regulates how goods, services and labor may be used, priced, or distributed, rather than relying on the mechanism of private ownership. Advocates of a free market traditionally consider the term to imply that the means of production is under private, not state control as well.

Free Market Competition - Supply and Demand

Free markets involve supply and demand and competition for demand.  Consumers benefit from this, because it does two things:

1.  Supply and demand regulate prices such that they meet consumers ability to pay.  If the price becomes too high, demand decreases.  Price becomes too low, profits can sink below production costs.

2.  It weeds out businesses that cannot produce supply at a price that will meet demand.  So, for example, inefficient business that can not keep production costs below price set by demand go out of business.

Those who advocate free market economy point out the value in having the market controlled by consumer demand.  What they often ignore is the fact that competition eventually fails.

What do professional sports team owners know about competition that many of us might not know?

Answer: They know that an unregulated free market eventually kills competition.  Why?  Because in the end, winner takes all.

Winner take all?  And when it comes to competitive sports, that bad, VERY bad for business.

When competition itself is the "product" for sale: You see in professional sports, it is the competition that sports fans come to see.  Ain't much competition, ain't much demand to see the games.  And that's what professional team owners know.

In other words, professional team owners know that if you don't regulate the market, it becomes winner-take-all, and when that happens, the competition goes away.  The same teams keep winning over and over.  Who wants to see a sporting event where the winner is pretty well known in advance?

How did they fix it?  Well, one way was to eliminate competition in recruiting new team members.  Winning teams have the best players.  You have to make sure they don't all get on one team.  Sure, some teams can get quite a few good players, and maybe the win more than they lose, but you have to make sure that the sports fan believes that, in any given sporting event, both teams have a least some chance of winning.

So they set up a system whereby losing teams get first choice in the coming crop of new players.  They called it the "draft."  Now, players haven't much liked that, so they've found ways to eventually make it a free market to some degree in terms of supply and demand for their talent.  But still, owners recognize that unregulated competition leads to winner-take-all..

When Demand fails to regulate prices

All works well in a Free Market Economy when demand is flexible.  When prices become too high, demand decreases.  BUT this does NOT work when demand is less flexible.  Here are two example to help clarify this:

Soda Pop: Since people can choose not to buy soda pop if the price is too high, demand is very flexible.  It goes away if prices are too high.  Soda pop makers cannot raise prices beyond a certain point

Gasoline: Due to the fact that we cannot do without some gasoline, demand is less flexible.  If prices rise, we may drive less, thereby decreasing demand, but gas refiners can simply make up for that by increasing prices and thereby preserving, even increasing their profit margin.  People still have to use gas to get to work.  Gas refiners actually like this, because gas is a non-renewable resource, so they can prolong the use of gasoline and thereby their profits.

Here's a diagram showing the difference between flexible and inflexible demand

When Competition Fails

Inflexible demand: When demand does not fall off when costs rise, there is much less need to compete for demand.  Everyone can profit without competing.  Those that are more efficient can profit more, but they don't have to take consumers away from their competitors.  They don't have to compete all that much.  They can, in fact, indirectly collude, because they know what drives their "competitors" without any need for direct contact (which would be "price fixing," an illegal act).

Winner-takes-all: When demand is very flexible, competition will eventually result in a single winner, and when there is only one supplier, there is no more competition.

Never heard of winner-take-all economy?  Well, there's lots of folks who hope you haven't.  It's the reason the rich are getting richer, the rest of us are staying the same, and the middle class is disappearing.  The top 1 percent of American society now controls more than half of the country's stocks and securities.   Since 1978—the richest 1% gaining 256% after inflation while the income of the lower earning 80% grew only 20%. The top 1% has gone from earning around 8 percent of the national income to 18 percent (but they aren't any more skilled than the workers below them).

 To read more about winner-take-all economics

 To read about winner-take-all politics, which enable winner-take-all economics