The Growth of Competition

by SUMNER H. SLICHTER

1

ONE of the most widely held misconceptions about the American economy is the belief that competition is gradually diminishing in vigor and is being supplanted in many industries by various forms of monopoly. The belief that competition is dying is probably accepted by a majority of economists and certainly by a large part of the general public. Probably no single belief has done more to undermine confidence in the future of the economy and to convince many people that socialism or central planning is inevitable.

If competition in fact were dying out, the matter would be most serious. Competition quickly and severely punishes managements that are stupid or lazy or that get out of touch with conditions. In the tough struggle between Communism and private enterprise, business needs the spur and the discipline of stiff competition to keep it dynamic and well managed.

But as inquiry will show, competition is not dying out; it is steadily spreading, taking new forms, and growing in vigor. Granted that in some industries it is not as strong or as pervasive as it should be. Granted that the business world is full of groups that wish strong competition for the other fellow but desire restraints on rivalry among their own members. Granted that some of the groups wishing to limit competition (the high tariff advocates and the “fair trade” advocates) have strong influence within Congress, and that there is danger that this businessman’s Administration may weaken the foundations of private enterprise by supporting curbs on competition. But the fact which overshadows all others in significance is that competition over the years has been gaining, not losing, in vigor, and there is good reason to expect it to continue to grow. What steps can we take to encourage it?

The belief that competition is dying owes its broad acceptance mainly to the rise of big business. People quite understandably but wrongly confused big business with monopoly. It was discovered that in most industries half to three fourths of the output was concentrated in the hands of four or live firms or less. The conspicuous growth of large companies led to the belief that concentration of economic power was growing. Books expounding this theme were widely read, and one by Berle and Means became famous. The Roosevelt Administration appointed a special commission to study the alleged concentration of economic power.

Within the last few years, however, it has become clear that the public’s ideas about the concentration of economic power were wrong. Two facts in particular stand out. One is that a considerable degree of concentration is found in many forms of activity. For example, more than half of the members of Protestant churches are found in 5 denominations out of more than 220; half of the candidates for Ph.D. in economies are found in four institutions, and half of the physicists with Ph.D.’s received their degrees in one of ten large institutions. Similar concentration occurs in other fields of learning — though the institutions that give the most degrees vary. Consequently, when consumers concentrate their buying of cars or cigarettes or soap, they are behaving in a normal fashion — in the same way that people do in selecting their churches or schools. Hence, concentration of production does not mean that sellers are dominating buyers. It simply reflects the fact that there is frequently a great concentration of people’s choices.

The second fact is that the degree of concentration of production has not appreciably changed in the last fifty years. Measurement of concentration is difficult — some studies show some increase, others show some decrease in recent decades. The only safe conclusion is that there has been little change in the degree of concentration. In so far as the belief that competition is declining rests upon the assumption that concentration of production is growing, it rests upon a fictitious foundation. Incidentally, even a growth in the concentration of production is not conclusive evidence that competition is becoming less vigorous, because a few large concerns may battle strenuously for larger shares of the market.

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THE evidence that competition has been spreading, taking new forms, and growing in vigor is abundant. This evidence falls into five principal parts: 1) the disappearance of various conditions that have limited competition; 2) the rise of new business methods and new types of business organizations that increase competition; 3) the increase in the number of products, services, and processes, broadening the range of buyers’ choices and intensifying the struggle for the buyers’ trade; 4) changes in conditions which intensify old forms of competition; and 5) the growing efforts of business to improve its products and to meet the desires of consumers.

The disappearance of various conditions that hare limited competition. The holders of the belief that competition is declining look back to an imaginary age when the country was made up of many thousands of small concerns all vigorously competing with one another. As a matter of fact, these conditions never existed. Population was Sparse and transportation was poor and expensive. Most communities could afford few business concerns and were pretty completely cut off from other places by the poorness of roads. It is plain that such conditions limited competition.

What a transformation has occurred! The growth of population has made possible several competing stores or dealers in many places where formerly there was room for only one. Far more important has been the effect of better transportation. The automobile and good roads have given extraordinary mobility to consumers. With two out of three families owning cars and with good roads covering the land, buyers are able to switch their custom from one seller to another, indeed from one town to another, to take advantage of any attractive buying opportunities within a radius of fifty miles or more. Never in the history of the world has such a large body of consumers been so well provided with good transportation and thus been so independent of the merchants of any particular town or place.

Improved transportation has also stimulated competition by exposing producers to competition from new and distant sources of supply. Of special interest are refrigeration and pipe lines. Refrigeration in vessels and railroad cars has put the winter fruits and vegetables of the South and the tropics in competition with the canned and preserved fruits and vegetables of the North; coal from West Virginia and Pennsylvania must compete in the East with gas piped halfway across the continent from Oklahoma and Texas.

The rise of new business methods and new tapes of business organizations that increase competition. One of the most stimulating competitive developments of the last century has been the rise of mailorder selling, because it has brought vigorous competition into thousands of communities, no matter how isolated. Mail-order selling has been a fairly recent growth. Back in the days of Adam Smitha time when many people uncritically assume that competition was more pervasive than it is today-there was no selling by mail. The great mail-order houses got their start in the last quarter of the nineteenth century. But mail-order selling is by no means confined to the mail-order houses, and it is constantly being extended to new products. One may buy by mail, not only any article of apparel or food or furniture, but trailers, boats, insurance, and prefabricated houses.

Mail-order selling was soon followed by two other types of distributor—the chain store and the supermarket. Each is based on the discovery that cutting traditional retail mark-ups produces rapid turnover of stocks and good profits. The grocery chains and supermarkets have little respect for the conventional boundary lines of business and are selling cigarettes, toys, phonograph records, hardware, underwear. Today about half of the supermarkets are carrying nylon hosiery. A year ago the proportion was one out of four. Three out of four supermarkets now handle houseware items such as cutlery, cake pans, butter dishes, and many others, and their sales of these items are estimated at more than $135 million a year. The supermarkets are even invading the fields of the drug store, the great disregarder of business boundary lines. In many communities more tooth paste and shaving cream are sold in supermarkets than in drug stores. But the drug stores have retaliated by selling groceries, so that in some places more coffee is sold in drug stores than in grocery stores.

New kinds of business are constantly arising to threaten the markets of old businesses. The motel competes with the hotel, the driv-ur-self companies with taxis and even with owning one’s own car, the outdoor movie with the motion picture theater, the book clubs with the retail bookstores, the vending machine with the retail store. Self-service drug stores have recently come into existence. Another new type of business is the renting of tools to persons who wish to build their own houses or to do other construction work for themselves. Savings banks, within the last fifty years, have had to meet stiff competition for the savings of individuals from life insurance salesmen, credit unions, mutual funds, and even government savings bonds; in some states savings bank life insurance competes with the ordinary life companies. Of particular importance in increasing the competitiveness of the economy are the recently developed venture-capital companies. These concerns help promising new companies get started in business by putting capital into them and in some cases giving them managerial assistance.

The increase in the number of products, services, and processes. The competitiveness of the economy is constantly being intensified by new products, services, and processes. If is true, of course, that the making of new products (and the plant and equipment to produce them) increases the demand for goods as well as the supply of goods because it brings into existence jobs and incomes. But the new products can get a share of the expanding market which they create only by competing vigorously with old products for the incomes of consumers.

In the period 1940-1951, when the output of the economy as a whole increased by about 5 per cent a year (faster than the long-trend growth) and population was growing less than 1 per cent a year, output and sales of television sets grew 113 per cent a year, freezers 71 per cent, dishwashers 21 per cent, frozen foods 19 per cent, kitchen cabinets nearly 15 per cent, water heaters 14 per cent, electric shavers 8.5 per cent, cigarettes 7.6 per cent, washing machines 7.5 per cent. Unfortunately two of the fastest-growing industries have been parimutuel betting, on which people spent over $269 million in 1952 — thirty-three times as much as in 1929 — and the gambling coin-machines, on which $150 million was spent in 1952 - nineteen times as much as in 1929. New industries which grow faster than the average are a constant threat to the established industries. The new industries force the old ones to keep prices down and values up in order to retain their share of the market and to keep their sales from shrinking.

Many new commodities and services meet essentially the same need as some old product or service. When this happens, two or more products or services battle for the same market. The advance of technology is constantly increasing the number of commodities and services that are in direct competition with each other. Consider some of the many cases of intercommodity competition that have developed during the last fifty years. Today oil competes with coal, and gas in turn compotes with oil. Cotton and wool meet the evergrowing competition of artificial fibers, paper competes with glass and cloth, the bus and the privately owned automobile with the railroad, frozen food with canned food, the telephone with the telegraph, the movies with the legitimate theater, and television with the movies, the radio with the newspaper, oleomargarine with butter, the trailer with the apartment or dwelling house. Five years ago the volume of detergents sold was one-eighth the volume of soap. Today sales of detergents by weight exceed the sale of soap.

Changes in conditions that intensify old forms of competition. Competition is being stimulated by the growth of leisure and by the fact that people own much larger stocks of goods than they formerly possessed. Within the last fifteen years the fiveday week has become fairly universal outside of agriculture. The spread of the five-day week has intensified the ancient competition between home work and industry and has caused the home to win back part of the lost ground. Largely because Saturday is no longer a workday in industry, people are painting and papering their own houses, even building their own houses in all or part, and are making increasing quantities of furniture and clothing. In one community the building of additional bedrooms in attics is so great that a course in night school instruction is offered to help owners do a better job. The result has been a rapid growth in sales of paints, patterns, hand tools, and semiprefabricated houses to individuals. Industry, of course, continues to strive for work that might be done in the home. One of the most interesting recent efforts of industry to compete with the home is the launderette — the self-service laundry.

The great increase in personal possessions in itself intensifies competition between the new and the old. In the early days of the automobile industry, for example, there was little competition between new cars and old ones — nearly all of the cars purchased were new ones. Today, most prospective buyers have the choice of buying either a good secondhand car or a new one. Indeed, the purchases of old cars in 1952 were considerably more than half again as large as the purchases of new cars. That means that unless the new cars are sufficiently more attractive than the old, the owners will use their old cars a year or two longer. Despite this, about three out of five purchasers of new cars trade in a car that is less than five years old.

What is true of automobiles is true of other forms of durable goods — refrigerators, vacuum cleaners, radios, even television sets. A large proportion of the possible buyers of new articles already possess an earlier model which serves the essential purpose and is not discarded until the new models are sufficiently superior. The secondhand market flourishes. The fact that American families are already well stocked with a wide variety of durable consumer goods is additional reason why producers place so much emphasis upon improving the quality of their goods rather than simply reducing the price.

The expansion of technological research. The expenditure of huge sums on improving old products and developing new products is a recent change in industry which has attracted surprisingly little attention. Half a century ago industry depended for inventions and discoveries largely upon enterprising and daring individuals (a Morse, McCormick, Bell, Goodyear, Edison, Marconi, or Ford) who went ahead on their own with such resources as they had or could beg or borrow.

During the last thirty years (and especially the last twenty) a revolutionary change has occurred. The search for new and better products and for better methods in many enterprises is becoming a normal part of business operations and is being financed out of the current revenues of business concerns. The result has been a startling growth in the scale of research and the support given to it. In 1950, private industry spent about $1.1 billion on technological research — nine times as much as in 1930. More than four times as many scientists were employed in industrial laboratories in 1950 as were employed twenty years before.

Industrial research is competition at its best, because it means that the producer is making systematic efforts to reduce his costs or to improve his product. Hence, the spectacular growth of research and the huge sums now spent every year on improving products and cutting costs refute effectively the assertion of those who argue that the economy is becoming less competitive. Never in the world’s history have existing products and methods encountered a greater challenge from new products and better methods. Better fabrics, better methods of insulation, better methods of preserving food are among the many changes that will soon be ready. Furthermore, the kind of competition represented by research tends to spread and to grow more intense. The very fact that one enterprise is using research to cut its costs or to improve its products means its rivals must do the same thing or be left behind. One laboratory leads to others and to further competition. Although industrial research has been spreading rapidly, even today only a few managements appreciate its possibilities. Hence there is room for an enormous expansion of research during the next few years.

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EVEN though the economy has been growing more competitive, the country would be wise to encourage competition still further. So important is keen business rivalry that we should not trust to chance that it will continue to gain in vigor. There are a number of ways in which it could be encouraged:—

Avoid reimposing the excess profits tax except in time of war. This tax hits hardest the very person who needs to be encouraged — the successful innovator. He will become a more formidable and effective competitor if he is permitted to plow back a large part of the profits of his successful innovation instead of turning most of them over to the government.

Forbid agreements by which manufacturers control the prices which retailers charge for the manufacturer’s product. Such agreements prevent the more efficient retailers from attempting to gain volume by underselling their less efficient rivals and thereby limit competition. Experience proves that the margins which manufacturers give to retailers are far greater than efficient retailers require.

Encourage enterprises to install new and better equipment by giving managements greater discretion over the rate at which they are permitted to charge depreciation for tax purposes. More rapid replacement of equipment would be encouraged by permitting larger write-offs in the first several years of the life of an asset.

Withdraw undue protection to American industries against foreign competition. A large part of American manufacturing industries are protected by such high duties that they have virtually no foreign competition. Although they are exposed to all kinds of competition in the American economy, some direct competition from abroad would be stimulating.

Encourage able young executives to go into business for themselves. This is a difficult and complicated problem. Many thousands of new enterprises are started in the United States each year, but about half of them are sold or liquidated within two years. One of the difficulties is that the persons best qualified to start new enterprises — namely, successful young executives in established concerns—usually have such good prospects for advancement with their present employers that they are little inclined to take the enormous risks inherent in striking out on their own or in accepting an offer from a struggling new company.

The venture-capital companies that have come into existence within the last few years are an important step in the direction of encouraging able executives to start out on their own. These concerns, as I have pointed out, are especially important because they put capital into new enterprises — enterprises which have no earnings record but which appear to be promising. Thus the venture-capital companies help able men obtain much-needed funds.

Changes could be made in the corporate income tax laws that would make working for a new and struggling concern a more attractive gamble for executives than it is today. An executive who gives up a secure job with an established enterprise is now compelled to sacrifice the pension rights he has earned during his service. This is unfair and, in addition, it is bad for the economy as a whole. When an executive who shifts from one company to another sacrifices his pension rights, pension rights become a form of industrial serfdom and discourage competition among concerns for executives. Company contributions to pension plans should not be permitted to be counted as an expense in computing tax liability unless the plan vests with any employee of, say, ten years service or more the right to claim all premium payments made on his behalf.

Help small companies with an earnings record obtain the capital needed for growth. Next to the scarcity of capital for new companies, the most serious lack in the capital market is the scarcity of funds for small but growing companies—companies which need medium-term or long-term loans but which are too small to go to the bond market and which represent too great a risk for life insurance companies and other institutional investors. Hence there is need for more venture-capital companies and also for more of the similar industrial development companies, such as the Industrial Development Bank of Canada and the Maine Development Corporation. If small concerns find it easier to grow, competition is bound to be brisker.

Expand the government’s support of research. There are limits on the kind of research that private industry can support, because the results of much research soon become available to everyone. Therefore, much of the support of research should come from the government. There has been an enormous increase in government support in the last fifteen years, and the Federal government is spending over $1.3 billion on research. Unfortunately the availability of the results of much government-supported work is unduly restricted by sincere but ill-conceived efforts to protect national security, and the government is now disposed to cut instead of increasing its grants for research. But government support of research not only aids defense but helps make the national economy both more productive and more competitive.

The growing competitiveness of the economy causes one to be confident that industry will continue to be progressive and that it will adapt itself successfully to changing conditions. The development that gives most reason for confidence is that the support of invention and discovery has become a normal part of business operations. There is, however, a paradox about competition in the making of innovations. Each innovator is attempting to discover something unique — in other words, to become a sort of monopolist. But the public need not fear this sort of monopoly. Each of the wouldbe monopolists is limited in his power by the fact that he has many rivals who are also attempting to discover acceptable innovations. America is fortunate that its economy in the last generation or so has developed to such an unprecedented degree this best of all kinds of competition. Rivalry in efforts to discover new products and to improve old ones assures us that our fund of technical knowledge will grow rapidly and that the economy will be tough, adaptable, and pretty well prepared for any emergency. The daily necessity of meeting new threats to their markets will keep managements keen and alert and will assure that only the most resourceful and progressive managements will survive.