The competition is not always what you think

At a time when the government is preparing to open the thorny issue of regulated professions, it is worth returning to the central concept that will underpin all the debates: competition. A concept that is often difficult to grasp.

No more right than left

First, because it is sometimes mistakenly assimilated to economic thought - liberalism - even though it essentially constitutes a tool, which allows markets to operate more efficiently, by eliminating unjustified rents while rewarding merits: except to reject the very principle of a market economy, competition is no more from the right than from the left. We can also note that so-called “centre-left” governments have undertaken ambitious pro-competitive reforms in the past, like Romano Prodi in Italy during the 2006/2008 period.

Next, competition arouses in each of us an ambivalent attitude: as consumers, we always support it; as employees or entrepreneurs, we sometimes dread it. Competition, we say to ourselves, is good for others, but rarely for ourselves.

Against the competition, arguments that have the appearance of common sense

This ambivalent attitude is based on arguments, more or less explicit, which have for them the appearance of common sense:

- competition, by lowering prices, would benefit consumers but penalize producers. Far from creating wealth, it would only redistribute the shares of the pie from one to the other. From this perspective, promoting competition would simply amount to defending a particular interest, that of consumers and their purchasing power;

- competition, by encouraging efficiency, would be to the detriment of quality: we would have to choose between low prices and mediocre quality or high prices and better quality. Applied to the distribution of medicines, for example, this would mean that more competition would necessarily result in a deterioration in the level of health safety;

- competition, by encouraging companies to cut costs, would backfire on employment and growth. By a kind of ruse of reason, the weekend consumer would thus participate in his own spoliation, he who is also a wage earner during the week.

These arguments - widely used - give the feeling that we should somehow choose sides: that of low prices, consumers, quantity or that of production, employees and quality.

How can we convince our fellow citizens that this binary choice is too simple to be true?

Not just a price drop

The discourse on the virtues of competition often tends to focus on one particular aspect: the price reductions it causes. Admittedly, competition is a powerful lever of purchasing power, the extent of which is often underestimated because price reductions are diffuse: each customer gains little from the price reduction, but the aggregate effect on The savings can be significant, given the size of the market. Saving 30 euros per year per customer thanks to the competition may seem anecdotal; but when the customers are 65 million, the total gain is around 2 billion euros. However, the impact of competition on demand cannot be reduced to this effect alone, however important it may be: by lowering the price, competition can also enlarge the size of the market and thus participate, to its extent, in a form of democratization of market access. This is particularly true in the transport sector, and in particular in the air sector. Even when the demand does not increase when the price drops - let us think of the case of the medicine that we are not going to consume more because of a fall in its price - it restores purchasing power which will be transferred to d other goods and services.

Promote variety, and often quality

Competition also favors variety, by widening the range of products and services available: each customer will somehow find the "shoe to his feet". For example, a distributor, faced with the arrival of new competitors, will choose to focus on low prices, on opening hours, on the breadth of the assortment, while another will prefer to differentiate itself by relying on the quality of service or on the proximity of the relationship with its customers.

Nor is competition incompatible with quality. First, faced with the threat of competition, companies are encouraged to be more attentive to the expectations of customers, who always have the opportunity to compare and, if necessary, "to look elsewhere". Empirical studies confirm that an intensification of competition encourages some players to differentiate themselves by the quality of service: in passenger air transport, it has been shown that competition on a route improves the punctuality rate of flights to UNITED STATES. Secondly, competition does not exclude proportionate regulation, which imposes a minimum quality standard on all players in the sector, in particular through standards (diplomas, product composition, safety rules, etc.).

An often overlooked effect on supply

Beyond its impact on demand, competition also has an effect on supply, an effect that is often overlooked.

To fully understand this aspect, it is necessary to return to the very nature of competition. Competition is defined as a process of rivalry between companies, which makes it possible to avoid the maintenance or creation of unjustified rents and which simultaneously rewards the most deserving, by granting them a temporary surplus profit. Competition therefore has the effect of encouraging companies to constantly explore new territories, particularly in terms of innovation (understood in the broad sense: products, sales techniques, etc.). Competition has a positive effect on productivity, through two main channels:

- it plays the role of a “spur” for established companies, encouraging them to “give the best of themselves”, in order to maintain their market share and grow;

- it allows new players to enter the market, with different economic models, sometimes more efficient, and encourages existing “business models” to question themselves and renew themselves.

Productivity friendly

Numerous empirical studies confirm the existence of a positive relationship between competition and productivity at the sectoral level, regardless of how competition is measured. Similarly, at the macroeconomic level, empirical work concludes that increased competition has a favorable effect on productivity in sectors where the intensity of competition is initially limited. The challenge of pro-competitive reforms is not only to restore purchasing power to consumers but also to improve the overall competitiveness of the economy.

And the job?

The impact of competition on the level of employment is undoubtedly the most controversial and polemical subject there is: each time a competitive shock occurs in a sector, the argument of bankruptcies and massive destruction of jobs is brandished by the established operators, while the outsiders promise job creation on their side. In these battles of figures, often fought in the heat of the moment and without the necessary hindsight, who to believe?

One possible solution is to rely on the many empirical studies conducted ex-post by researchers on the relationship between competition and employment. Admittedly, these studies only reflect the current state of our knowledge on the subject and in no way prejudge different future results; however, they provide an initial fairly clear trend: competition is not the enemy of employment.

Firstly, empirical studies show that restrictions on competition curb the growth of employment: thus, studies on the effect of the Royer-Raffarin laws in food distribution conclude that there is a negative impact of approximately 100,000 jobs. In the same vein, studies on protectionism show significant job losses, when the effects on the entire value chain are taken into account: thus, when George Bush introduced customs duties on steel to preserve 3,500 jobs among steel producers, this measure leads to an increase in the price of steel and the destruction of between 12,000 and 43,000 jobs downstream among... user companies, which have become less competitive.

Secondly, studies on experiences of opening up to competition do not confirm the thesis of a net reduction in employment. When demand is price elastic, competition increases the size of the market and thereby creates jobs, especially among new entrants. Thus, the liberalization of road transport in 1986 in France led to a 10% drop in prices, an increase in traffic and employment, rising from 200,000 to 300,000 employees in the space of 10 years. When demand is not price-elastic, the indirect effects of competition on employment must be taken into account: the gains in purchasing power achieved here will very quickly be transferred elsewhere. Thus, a study by ODIT France on the rise of air transport, marked by sharp reductions in ticket prices, concludes that indirect job creation in France in the order of 65,000 to 72,000 in ... the catering and hotel-tourism sector.

Remuneration and working conditions

Does this mean that the impact of competition on employment is not a subject? Surely not. First, competition can have an undesirable impact on wages and working conditions. But it is precisely the role of labor law to enforce a set of rules of the game that are binding on all actors. Next, competition leads to the reallocation of jobs between companies in the same sector and/or between sectors, thus generating social costs. Once again, it is the role of continuing training and an effective employee mobility policy to prepare upstream and support employment transitions. Competition on the goods market is not contradictory with protection of employees, both strong and effective, on the labor market.

More generally, competition keeps all of its promises only if it is regulated, supervised, whether by labor, competition or consumer law. Competition and rules of the game, far from excluding each other, complement each other; let's not forget that the English term for competition - "competition" - explicitly refers to the register of sport: have we ever seen a sporting competition take place successfully without a minimum of rules of the game and without an impartial referee? ? Competition is not always

what we believe

Emmanuel COMBE

University Professor

Vice-President of the Competition Authority