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Pseudo Competition

November 26, 2011

Not every critic loved the 2009 film Duplicity, starring Julia Roberts and Clive Owen. The British newspaper The Telegraph complained of a lack of “any sexual charge” between the stars, and a plot whose complexity is “sometimes overdone.” Slate called it muddled, and quibbled that a film should make “actual narrative sense.”

But seemingly everyone who has seen Duplicity loves its opening sequence. The scene is a rain-slicked tarmac, with two corporate jets facing each other at showdown distance. The two chief executives in command of them, Howard Tully (Tom Wilkinson) and Richard Garsik (Paul Giamatti), emerge from their retinues and stride toward each other. Then, as the opening credits roll, they engage in a ridiculous, flailing, ineffectual shoving match, ending up panting on the ground. By presenting all this in silent slow-motion, under ominously dusky lighting, the director Tony Gilroy mocks the whole idea that their struggle could be epic.

Even The Telegraph called it virtuoso.

Why does that sequence speak to people? Is it because the spectacle of head-to-head corporate competition has in reality become so ridiculous? We suspect that’s it. (Though old guys in bespoke suits whaling on each other is always good fun). The fact is that much of today’s competitive energy is exerted in this kind of titanic and ultimately low-return battle.

In more and more cases, we see markets that used to feature many sellers now dominated by just a few. And we observe a dynamic between those few behemoths that puts up a great show of competitive fury but ends up signifying next to nothing in terms of valuable innovation. At the same time, we see lavish allocation of resources, not just on large retinues and private aircraft, but on superficial product differentiation, relentless advertising, and expensive selling activities to manufacture demand that does not naturally exist. In other words, what we do not see is what Adam Smith told us to expect from competition in free markets: important innovation and efficient allocation of resources to fulfill society’s needs.

What we’re see instead is, to coin a term, pseudo-competition. It’s the kind of competition oligopolists engage in: enough to keep antitrust regulators at bay, but not enough to yield the fruits of true competition. Some of the activities generally regarded as competitive — Comcast and FIOS dissing each other on TV — actually are anti-competitive, raising barriers to entry for those who can’t make huge expenditures on advertising.

These are serious charges, we know, and we’ll present the facts to support them in Standing on the Sun (our forthcoming book). Our point is that, as fans of capitalism, this is one of the things we have to admit that capitalism, as it’s currently practiced in mature economies, isn’t getting right. If capitalism is capable of evolving, as we say it is, then this is something it needs to leave behind.

The kind of competition that carried the day in Adam Smith’s world of many small competitors will have to take on a new form suitable for a world of global corporations with market power. The quest for “sustainable competitive advantage” that has so captivated executives and their consultants is antithetical to the ideal of “free markets.” Today’s form of capitalism offers management an overwhelming incentive to amass market power and dare regulators to stop them. After all, why invest in a competitive advantage if you can’t use it to threaten would-be rivals. (Odd, isn’t it, that vocal proponents of free markets also oppose the regulation that would keep markets competitive?)

Is there any reason to believe that, as the real action of capitalism shifts to emerging economies, we will get beyond this wasteful model? Perhaps. In many less developed economies, demand is growing so quickly that the field of competitors remains wide. Though a Unilever, say, might compete in India head-to-head with a Procter & Gamble, the main points are won there through real innovation (i.e. value adding for customers) because there is still ample work to do to adapt the product to local requirements and establish efficient supply chains. (China, of course, presents its own story. While competition certainly occurs, the unabated and even growing reliance on state-owned enterprises exerts its own discipline on competitive practices.)

The usual response of End of History believers is that the differences between mature and emerging economies are temporary, only due to their different stages of maturity. Inevitably, they say, emerging economies will adopt the West’s prevailing model of capitalism — and wind up in the same place. But capitalism’s main action will take place in markets where competition has not already reached its end-game, and any capitalist raised on a competitive landscape of oligopoly will have to learn to adapt.

More important, we don’t believe it’s the end of history. We think that the game evolves, and once you’ve become the center of gravity of capitalism, there’s no need to conform to old rules. You can make your own. And if you had already seen how ridiculous Paul Giamatti looked ruining his suit on a tarmac, would you then go and do it yourself?

Chris Meyer & Julia Kirby

Chris Meyer & Julia Kirby

Chris Meyer’s mission is to anticipate and shape the future of business. Julia Kirby is a senior editor at Harvard Business Review.

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From → Competition, Economy

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