Dogma Premise # 6

 Competition ensures sustained excellence.

Like Dogma Premise #5, Dogma Premise #6 makes a false assumption about how producers respond to competitive threats.

Producers faced with competitive threats based on price do not always respond by increasing efficiency, and for similar reasons producers faced with competitive threats based on quality do not always respond by increasing quality.

As a result, market competition does not necessarily lead to either cheaper or better products.

Suppose, for example, that an incumbent mouse trap maker is confronted with a new competitor that sells what is undeniably a better mouse trap.  The incumbent could set to work to design their own better mouse trap with comparably improved performance (e.g., quieter, faster, quicker, higher-capacity).

The incumbent could also respond to the quality-challenge with a cost-based move, perhaps discovering manufacturing efficiencies that allow it to sell the worse mouse trap at a lower price, thus maintaining both unit sales and profitability.

However, a variety of other moves are also available.  For example, the incumbent might increase its marketing budget to make its worse mouse trap seem like a better mouse.  Or it might cast doubt upon the safety or efficacy of the competing product.  Or it might mount a legal challenge to the better mouse trap, based on a claim of copyright, trade mark, trade dress, or patent violation.  The incumbent might attempt to lock-up big customers with long-term supply contracts, or big retailers with exclusive distribution agreements.

The incumbent might also achieve a price reduction by lowering its cost base in ways that actually make its bad mouse trap even worse.  For example, it might use cheaper parts that don’t last as long, or remove quality checks that increase the risk of defects reaching the customer.  It might switch to materials or processes that are potentially harmful to customers or the environment but not prohibited by regulators.

The firm’s short-term gains resulting from product impairment will not necessarily result in long-term losses, especially if the product is purchased very infrequently (like a hot water heater), or the producer s not associated with any particular brand, or can change its brand easily, or if the manufacturer intends to sell the company along with its difficult-to-detect "bad will" and invest the earnings in a different industry.

And those are just the legal moves.  Frequently attempted but rarely prosecuted illegal moves include predatory pricing to bankrupt the start-up company, or pricing collusion, which is only illegal if there is an explicit agreement, but may be legally effected by non-verbal communication called “price leading.”  The potential competitors might also agree not to compete by dividing the market, with one selling only in the West and the other only in the East, or one selling to consumer customers and the other to industrial customers.

On some occasions, the most effective response to a superior product is to match the new product’s features.  However, that move is not always possible, and even where it is possible it may not be the most profitable response.  As a result, competition may result in superior products, or it may result in inferior products, or it may result in a higher cost structure for all market participants and a general price increase passed on to customers.

Because the guiding principle in responding to product innovations is profit, not quality, the suggestion that competition results in ever increasing quality is not certainly true or generally true.  At most it is sometimes true.  Competition does not reliably lead to product improvements.

Dogma Premise 7

All Dogma Premises