This paper questions the existing notion of competition prevalent in economic theory. It is shown that the prevalent idea of competition is incompatible with economic development. Fair competition, this paper argues, ought to be understood in context. The paper ends by providing some preliminary suggestions to economists and policy makers on how to understand competition.Competition; Economic development; Classical economics; Indian economy

Thomas, Alex M

Walling, Lima

English

Research Papers in Economics

1
Fair Competition: The Engine of Economic 
Development2
Author information
Alex M. Thomas
Research Scholar
M Phil Economics 
alexmthomas@gmail.com
S LimaKumba Walling
Research Scholar
PhD Economics
akumwalling@gmail.com
Department of Economics
University of Hyderabad
Gachibowli
Hyderabad
Andhra Pradesh 5000463
Fair Competition: The Engine of Economic Development
The idea of competition is central to economics. The study of perfectly competitive 
economies attracted economists till mid 1900s when Edward Chamberlain and Joan 
Robinson attempted to develop a competition theory which is more realistic. Today, this 
is known as imperfect competition. Economists have also looked at how oligopolies, 
monopolies and monopsonies operate, in a theoretical setting, often with the help of 
game theoretic tools. In conventional economics, the study of competition falls under 
the label of microeconomics. However, both macroeconomics and growth theories 
implicitly   assume   a   certain   notion   of   competition.   Thus,   in   economic   theory, 
conclusions   emanating   from   growth   theories   crucially   depend   on   what   sort   of 
competition is assumed.  
Competition and economic development
Economic development refers to an improvement in the livelihood of people – in terms 
of incomes, availability of employment, access to safe drinking water, access to health 
facilities, access to housing facilities, access to education, access to credit, access to 
information, access to transportation, access to telecommunication and so forth. Usual 
accounts of economic development highlight the role of human capital, incomes, health 
facilities, better institutions, etc in improving the quality of life of people and thereby 
promoting economic growth as well as development. Though all accounts of economic 
growth implicitly assume a certain state of competition (perfect competition, oligopoly, 
monopoly or a combination of the three), this state is often given inadequate attention 
in the literature and in policy discussions. In fact, what is often overlooked is that the 
factors which promote economic development work only under a certain configuration 
of competition. However, an adequate understanding of the concept and mechanism of 
competition is yet to be found in the economic literature. This lacuna creates problems 
not only for economic theory but also for applied economics; in particular, for policies 4
designed   to   promote   economic   development   such   as   competition   law,   banking 
restrictions, financial regulation, labour laws, trade directives, etc. For instance, it has 
been pointed out that attempting to promote competition and efficiency may actually 
cause unemployment (Bhattacharjea 2010, 32).
What is fair competition?
Prefixing competition with fair brings to our consideration the issues of justice and 
ethics. There, however, cannot be a universal algorithm for what is just and ethical. 
These have to be devised based on concrete socio-economic conditions prevailing in a 
country. For example, in a country which has a small population of labourers, adoption 
of labour-saving technology is relatively less unjust when compared to a country which 
has a large unemployed labour force. In short, the idea of fairness should be contextual, 
especially when examining a complex phenomenon such as competition. Therefore, fair 
competition can only be defined keeping in view the broader macroeconomic objectives 
of India such as elimination of poverty, increasing employment, ensuring price stability, 
etc.   This   brings   us   to   the   question:   can   the   objectives   of   competition   law   be 
diametrically opposed to the broader macroeconomic objectives? Can we have efficiency 
as an objective even it leads to job losses? Shouldn't competition law be so designed to 
promote economic development? Bharracharjea categorically writes in the negative that
the objective of modern anti-trust is to present market players from restricting 
competition in ways that are on balance harmful to efficiency and consumer 
welfare. It targets abuse of a dominant position in the market, not firm size or 
dominance as such, and it does not seek directly to control prices or profits: it 
only strives to preserve conditions which would allow market forces to keep 
them in check. It does not attempt to fulfill social objectives such as protecting 
employment. (Bhattacharjea 2010, 32)
In the following paragraphs, it will be argued that fair competition is a necessary 
condition for economic development and in order to ensure this, one requires an in-
depth understanding of the sphere of production and social relations in an economy. 
Competition policy
Usually, competition laws are in place to ensure that firms can make price and quantity 5
adjustments with ease without abusing its dominant position; the merits of such 
adjustments are efficiencies in allocation and production and the welfare of consumers. 
Moreover, as the following excerpt (which is part of a recent judgment pronounced by 
the Supreme Court of India) indicates, the notion of competition is only applied to 
market structures:
The main objective of competition law is to promote economic efficiency using 
competition as one of the means of assisting the creation of market responsive 
to consumer preferences. The advantages of perfect competition are three-fold: 
allocative   efficiency,   which   ensures   the   effective   allocation   of   resources, 
productive efficiency, which ensures that costs of production are kept at a 
minimum   and   dynamic   efficiency,   which   promotes   innovative   practices. 
(Judgment in Civil Appeal No. 7999 of 2010 pronounced on 9th September, 
2010)
The above passage suggests that the creation of markets which respond to consumer 
preferences promote economic efficiency. Ultimately, competition law aims to create an 
economy which enjoys the benefits of perfect competition. By now, it is quite well 
known that the state of perfect competition is a situation in which “the possibility of any 
competitive behavior has been ruled out by definition” (McNulty 1968, 641); although it 
figures prominently in all textbooks of microeconomics. It is a state where the forces 
and effects of competition have reached their limit. In fact, according to McNulty, the 
concept of perfect competition is “analogous not to the principle of gravitation but 
rather to the idea of a perfect vacuum” (McNulty 1968, 643). Moreover, dynamic 
efficiency is not compatible with a state of perfect competition. For, innovation in one 
firm will enable it to fix prices and it will ensure extra-normal profits. In a state of 
perfect competition, the firms are price takers who earn just enough to cover their costs. 
Therefore, the above objective of competition policy seems to be flawed on the following 
grounds: (1) perfect competition as a state of affairs is not only unrealistic but also 
undesirable owing to the absence of any competitive forces, (2) sphere of exchange is 
preferred over sphere of production which can lead to the creation of inappropriate 
policies, especially for a country like India. 
Understanding the process of competition: markets and prices6
One of the explanations provided for sustaining competition in markets is the protection 
of consumer interests. A competitive market structure, in theory, alters quantities and 
prices in accordance with the consumer tastes and preferences. Such an understanding 
of competition makes the error of viewing consumers as distinct from producers. An 
individual, in most cases, is both a producer and a consumer of commodities and 
services. One wonders why competition protects only consumer interests. For instance, 
if an individual does not receive adequate income from production, she will not be able 
to participate in the consumption process. The reason behind this demarcation of 
individuals into consumers and producers is because of the dominance enjoyed by the 
sphere of exchange in modern economic theory and analysis. The prominent economist, 
Krishna Bharadwaj points out the danger in such analyses:
The relations of exchange are not autonomous, nor are the extent and specific 
forms   of  exchange.  They   are   primarily,  and to  a considerable   extent, a 
manifestation of the relations in production, which, as it were, provide a basis 
for supporting the sphere of exchange (or circulation). The type of exchange 
signifies the existence of a certain institutional organizational form within 
which production takes place. (Bharwadwaj 1986, 66)
In other words, the study of exchange relations cannot be divorced from that of 
production relations and conditions. More importantly, the conception of competition 
cannot afford to look at the sphere of exchange alone. 
The concept of competition has to have empirical relevance and should be 
operational in nature. Usual accounts of competition, limited as they are, primarily 
study the interaction between private business firms. This narrow outlook poses severe 
problems for an economy such as ours. For, as we know, organised sector employment 
forms   less   that   10  per  cent   of  the  total  employment.  A  satisfactory   account   of 
competition for India must be able to describe how firms/households compete in the 
informal sector. Or, it should throw light on how the informal sector and formal sector 
compete, if at all, for labour. In other words, an informed competition policy can only be 
formed after we have an adequate understanding of the structure of the Indian economy 
– relating to production, exchange, consumption, employment, demographics, finance 
etc. 7
The idea of allocative efficiency is linked to the theory of prices. The relationship 
between market prices, efficiency and economic development therefore requires to be 
scrutinized. First, the idea that market prices are unbiased, neutral and apolitical needs 
to be dispelled. Such a view is tenable only if the sphere of exchange is divorced from the 
sphere of production. To quote Bharadwaj again:
Under competitive exchange, an appearance is maintained of an intrinsic 
justice in the operation of the impersonal and 'self-propelling' market forces of 
supply and demand, especially when distribution is also explained on the same 
ground (Bharadwaj 1986, 21).
In short, it would be dangerous to make market prices the sole regulator of exchange. 
For, “exclusion in inherent in the logic of markets. Markets may exclude people as 
consumers or producers or both” (Nayyar 2003, 97). Consumers can be excluded from 
the market owing to insufficient incomes or because of their location. Producers can be 
excluded if they have neither physical nor financial assets. They can be also excluded if 
they do not have capabilities which are acquired through formal education, training or 
experience. However, from the point of view of efficiency, these exclusionary tendencies 
of the market pose no problem. But, if the objective is economic development, trying to 
achieve efficiency may not be the correct path to choose. Thus, the objective of fair 
competition becomes crucial, for market prices can have devastating effects on the 
livelihood of a large number of people. 
Evidently, pricing mechanism alone cannot lead to fair competition and hence to 
economic development. Indeed, competition exists in varying degrees in all aspects of 
our  economic lives – be  it  employment,  production, consumption or sales.  Fair 
competition, however, is largely a function of the institutions which are in place. They 
could be taxation laws, banking regulations, investment limits, restrictions on foreign 
exchange, labour laws, etc. Or they could be determined by gender, caste, region or 
language. Or they could be directly affected by the sector in which the individual is 
employed – formal or informal sector. Since competition law is an institutional 
arrangement which mediates between economic development on the one hand and 
social development on the other, it ought to occupy a more critical role in promoting 
development (see Nayyar 2003, 99 on the crucial role of institutions) and not just 8
attempt at achieving efficiency.
Towards ‘fair’ competition
Interestingly, the word competition comes from the Latin word competere which meant 
'strive together'. An appropriate notion of competition should, perhaps identify, ways in 
which individuals and firms can 'strive together' or compete which could result in 
improvement in quality of commodities and services, increase in profits and wages, 
strengthening   of   consumer   loyalty   as   well   as   freedom,   better   organizational 
arrangement, environmental gains and overall gains to the entire community. Only if 
competition is conceptualised in such a manner can we achieve economic development. 
The above outcomes of competition become irrelevant if one cannot describe the 
process   of   competition   itself.   Since   economics   primarily   deals   with   prices   and 
quantities, non-economic factors affecting competition such as gender, caste, religion, 
language, etc are not taken into account.  In fact, these socio-cultural factors play a very 
significant role in the Indian production sphere. For example, a dalit woman may be 
denied a service even if she can pay its market price. Or they end up in poorly paid jobs 
such as sweepers, loaders, unskilled construction workers, security guards, etc (Ghosh 
2011).
A satisfactory account of competition must at least contain answers to the 
following questions: 
(1) What processes can be considered competitive? 
(2) Which factors determine the ability to compete? 
(3) What are the benefits of competition?
The temptation to answer these questions in terms of equilibrium outcomes must 
however be resisted. 
Processes which can be considered competitive would depend on the specific 
socio-political and economic conditions of an economy. For instance, because 60 per 
cent of Indians are employed in agriculture, one should be skeptical about a competition 
policy which favours non-agricultural sectors at the expense of agriculture. For, such a 
policy will have undesirable affects on the earnings of those involved in agriculture. 9
Similarly, a competition policy which targets the formal sector alone will have adverse 
effects on the informal sector. Therefore, our competition policy should be one which 
not only takes intra-industry and inter-industry competition into account, but also the 
competition between agriculture and non-agriculture, formal and informal and rural 
and urban sectors. The existing notion of competition is one which only tries to attain 
efficiency. Surprisingly, it has been argued that firms which promote development could 
engage   in   anti-competitive   behaviour   (Ghosh   and   Ross   2008,   37)   and   hence 
competition policy should not try to promote economic development. Such a rationale 
cannot be accepted if the objective of competition policy is to attain fair competition and 
through this economic development.
The ability to compete will be constrained by the availability of factors such as: 
incomes, technology, property, learning, information, credit, etc. Access to credit is a 
major hurdle especially for small firms (Penrose 1959, 192). In addition, the location of 
firms will crucially determine the ability to compete. For example, a producer who is 
located in an urban slum will not have easy access to public services. Non-economic 
factors such as gender, caste and language also play an important role as pointed out 
earlier. 
No ex ante judgments can be made about the outcomes of competition. This is 
because, the outcomes would be determined through a complex interaction of economic 
and non-economic forces. Sylos-Labini, an economist who devoted numerous years 
studying oligopoly, writes:
cost   reductions   due   to   new   methods   which,   because   of   technological 
discontinuities, are not within reach of all firms lead not to price reductions but 
to increased profits. On the other hand, trade-union pressure or government 
intervention may cause cost reductions to be translated into higher wages 
(Sylos-Labini 1969, 123).
The above excerpt highlights the dynamic role of interdependence present in an 
economy. That is, the rice industry, steel industry, electronics industry and mobile 
phones industry are interrelated. This interdependence is clearly brought out in an 
input output transactions table. In any case, because technological improvements are 
often firm specific, they generally result in increased profits and not in price reduction. 10
Additionally, the presence of institutions such as trade unions help the workers in 
receiving a portion of the technology-induced profit rise. However, it will be possible to 
analyse the social benefits by examining variables such as wages, profits, employment, 
etc in particular industries as well as across the entire economy.  
Summing up
To  conclude, economic  development is  broadly  understood  as   the  betterment  of 
livelihood of the individuals in an economy. These individuals, who are both producers 
and consumers, could be employed in agriculture, industry or services. A sustainable 
plan for economic growth and development is one where all the producers compete 
(work together) in such a way that all the participants gain. Such a plan can be devised 
only if we pay particular attention to the production sphere and take non-economic 
factors into account. By concentrating our competition policy on the exchange sphere, 
we are forced to consider ways to only achieve efficient allocation of resources and not 
the generation of resources.  Whereas, the concept of competition ought to be a broader 
one, which suggests ways and means of increasing output, employment and incomes. In 
short, a policy to achieve fair competition must be envisioned so that it will promote 
economic growth as well as development.
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Fair competition: The engine of economic development

Fair competition: The engine of economic development

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