Mike Munger recently wrote This is a basic misunderstanding of economic competition that many legislators and regulators seem to harbor: the idea that improvement competition this means ensuring that there are more businesses rather than fewer. This misunderstanding arises from what Munger calls a confusion between the classic definition of “perfect competition” (which Munger calls a “silly concept”) and real competition, as it occurs in the world outside the blackboard of the classroom. Munger cites this example:
Senator Elizabeth Warren recently argued that the Biden administration, through the FTC, should block Capital One’s acquisition of Discover. Its logic is that of “perfect competition”, two small companies are better than one medium-sized company. Yet you only need to look at the industry as a whole, where Visa, Mastercard and American Express control 98% of credit clearing transactions, to see the folly of this approach. If the Capital One-Discover marriage can be consummated, there will be more competition in the industry, not less. The newly created entity would have the financial muscle and transaction scale to force the credit card industry off its anachronistic ways.
This got me thinking about other cases where “more companies = more competition = better” doesn’t hold true. Two big examples stood out to me: banking and mobile operating systems.
Let’s start with the first. Before Great Depression, Canada had a largely unregulated banking system. From this system emerged a relatively small number of very large banks operating throughout the country. In the United States, there was a highly regulated banking system that (among other things) was heavily oriented toward a “unit banking” system rather than a bank branch system. That is, banks were geographically limited in their ability to expand (operating across state borders was often prohibited) and were therefore limited in size. From this system grew a system of tens of thousands of fairly small banks across the country.
From a “more companies = more competition = better” perspective, it might seem that the United States, with its large number of banks, would be in a better situation than Canada, which was “dominated” by a very few big banks. But in practice, the opposite happens. Because the banks were so numerous and small, it also meant that each bank was very undiversified in the assets it held and was virtually chained to local economic conditions. Large, highly diversified banks can absorb economic shocks better than small, undiversified banks. This is part of the reason why, during the Great Depression, the highly regulated American banking system experienced more than 10,000 bank failures, while the lightly regulated Canadian banking system had none.
The second example that comes to mind is mobile operating systems. These days, it’s not uncommon to see some concern that mobile operating systems are actually a duopoly between Android and iOS. Wouldn’t it be better if there were more mobile operating systems on the market, due to increased competition? Well no, not necessarily. If you’re wondering why, as Munger himself would say, the answer lies in transaction costs.
Let’s take a fairly extreme example. Imagine that a genius snaps his fingers and tomorrow there are 10,000 different mobile operating systems on the market. Why wouldn’t that be good for competition? Well, one of the annoying real-world features that gets left out of introductory blackboard models is transaction costs. If you want to produce and sell an app that simulates a coin toss to help improve the lives of undecided people, there is simply no way to program and format that app for 10,000 different operating systems. Transaction costs are simply too high. The same is true for all programmers and application developers. The more operating systems there are on the market, the more complicated and expensive it is to make your application or program available to everyone on the market. Over the past two decades, there has been a greater variety of operating systems. Symbian was one. BlackBerry had its own, called (rather unimaginatively) BlackBerryOS. WebOS was another. Windows Mobile also performed well. All of these are gone, leaving Android and iOS locked against each other. Would it be better if all those defunct mobile operating systems were still around, providing more and better competition? Perhaps this is the case in the fantasy world of perfect competition. But in the real world, a world where transaction costs exist, it is not at all obvious that this is the case. More operating systems means increased transaction costs associated with producing whatever we use those operating systems for, which could very well make the mobile operating system market less productive than more.
What is the “optimal” number of operating systems? I don’t know. You neither. The answer cannot be derived from the blackboard, the chair or the tea leaves. But the best chance we have of discovering the answer is when markets are free enough for players to engage in real competition in global markets.
