Paradox of competition in
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
names a model of a situation where measures, which offer a
competitive advantage
In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.
A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...
to an individual economic entity, lead to nullification of advantage if all others behave in the same way. In some cases the finite state is even more disadvantageous for everybody than before (for the totality as well as for the individual). The term ''Paradox of competition'' (german: Konkurrenzparadoxon) was coined by German economist
Wolfgang Stützel
Wolfgang Stützel (23 January 1925, in Aalen, Germany – 1 March 1987, in Saarbrücken, West Germany) was a German economist and professor of economics at the Saarland University, Germany. From 1966 to 1968 he was member of the German Council ...
. It is about a case of a
rationality trap.
Stützel distinguishes three categories of paradoxes of competition:
# Circuit paradoxes
# Classical paradoxes
# Marx paradoxes
Examples
*
Advertising
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
: the overall demand for detergent is assumed steady. By advertisement the individual venture can expand its share in market at the expense of its competitors. But if all producers of detergent do the same, their expenses for advertisement rise without gaining higher sales at large, so that profits even decline.
*
Opening hours: assumed the legislator extends the allowed opening hours by two hours. Now when an individual shop applies that new opening hours, though it has to pay more work, it can gain higher sales and thereby more profit. But if all shops practise the extended opening hours, customers can shop again at other shops with similar supply and the potential sales volume again allocates to all (similar) shops.
*
Wage policy
A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as '' minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remun ...
: for each individual country counts: a state can improve its price competitiveness in comparison with other states by a restrained wage policy. But from that it does ''just not'' follow that all countries (can) improve their competitiveness when they apply restrained wage policy.
*
Current account balance: a current account surplus is to the expense of an others state current account deficit – insofar not all can improve their balance at the same time. On the contrary – if all simultaneously begin to cut down their imports they will have a decline of balance in their current account in the end. (see also:
protectionism
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulatio ...
in the 1930s:
Smoot–Hawley Tariff Act
The Tariff Act of 1930 (codified at ), commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, was a law that implemented protectionist trade policies in the United States. Sponsored by Senator Reed Smoot and Representative Willi ...
).
*
Currency devaluation
In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curr ...
: an individual state with own currency can achieve to lower overseas prices of its export goods by means of currency devaluation. All countries together in total cannot do so. If countries undersell each other with devaluations, the danger of
currency war
Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currenc ...
grows, consequence of which is a spiral of devaluation.
Partial sentence, Global sentence, lead and lag effect
Wolfgang Stützel analyses paradoxes of competition using the concept of
Balances Mechanics
The Balances Mechanics (german: Saldenmechanik; from balances of bookkeeping respectively the credit system and mechanics to characterize the strict universal identities) is a work and mean of economics, comparable with Stock-Flow Consistent Model ...
(german: Saldenmechanik). Specifically he defines and distinguishes validness which is valid for individual economic entities respectively individual groups (''Partial sentence''), and validness which counts for the totality of economic entities (''Global sentence'').
Concerning the pursuit of export surpluses he distinguishes as follows:
* Partial sentence: ''Every country can achieve export surpluses by expanding its export. Every country can achieve export surpluses by reducing its import.''
* Global sentence: ''The sum of export always equals the sum of import.''
On overall economy examination (
macroeconomics,
aggregation problem
An ''aggregate'' in economics is a summary measure. It replaces a vector that is composed of many real numbers by a single real number, or a scalar. Consequently there occur various problems that are inherent in the formulations that use aggregate ...
) the benefit which individual economies want to achieve for themselves (legitimately) often appears as so called ''lead effect'' as against an inevitable ''lag effect'' of others. When lag effects are condoned, no paradox of competition arises. Solely because ''individual supply and individual demand'' turn out to be more elastic than ''overall supply and overall demand'' the classical paradox of competition can occur.
[Wolfgang Stützel: ''Paradoxa der Geld- und Konkurrenzwirtschaft.'' Aalen 1979. p. 369.]
See also
*
Paradox of saving
The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower ''total'' saving. ...
*
Market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indi ...
*
Balances Mechanics
The Balances Mechanics (german: Saldenmechanik; from balances of bookkeeping respectively the credit system and mechanics to characterize the strict universal identities) is a work and mean of economics, comparable with Stock-Flow Consistent Model ...
*
Tragedy of the commons
Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy i ...
Literature
*
Peter Bofinger: ''Grundzüge der Volkswirtschaftslehre''. Pearson Studium, München 2006.
*
Wolfgang Stützel
Wolfgang Stützel (23 January 1925, in Aalen, Germany – 1 March 1987, in Saarbrücken, West Germany) was a German economist and professor of economics at the Saarland University, Germany. From 1966 to 1968 he was member of the German Council ...
: ''Paradoxa der Geld- und Konkurrenzwirtschaft.'' Aalen 1979.
* Rolf-Dieter Grass, Wolfgang Stützel: ''Volkswirtschaftslehre.'' München 1988, p. 156-165.
References
This article is a translated version of the German Wikipedia article.
{{Economic paradoxes
Paradoxes in economics
Market failure