Like many people, I was a fan of John Madden, the NFL coach and game commenter who died last week at age eighty-five. He was a larger-than-life character who made football more understandable to people like me who wanted to watch football on TV but didn’t know what to watch for.
If the only things to comment about were Madden as a person and an expert, and football as a game, it wouldn’t make sense for me, an economist, to write about him. But the history of Madden as commentator, and Fox as his employer, illustrates some important truths about economic competition, truths that many people in the Biden administration either have forgotten or, more likely, never knew. The truths can be summed up in a few pithy statements. First, competition is a tough weed, not a delicate flower. Second, it takes only a few to compete. Third, if you insist on judging the extent of competition by the presence or absence of “perfect competition,” you will miss most of the competition that matters.
This is from David R. Henderson, “John Madden, Joseph Schumpeter, and Competition,” Defining Ideas, January 6, 2022.
Competition between Fox and CBS:
In a December 2018 article, “The Great NFL Heist: How Fox Paid for and Changed Football Forever,” Bryan Curtis illustrates this with his great discussion of the competition for televising NFL games when Fox entered the picture in the early to mid-1990s. CBS was the established broadcaster of the National Football Conference (NFC) football games. Airing NFC games was valuable to whoever won the competition for two reasons. First, NFC teams had dominated previous Super Bowls and so generated more fan interest. Second, NFC teams tended to be in bigger markets: Philadelphia, Chicago, Washington, Dallas, and San Francisco, to name five. Rupert Murdoch, owner of newcomer Fox, saw that also. But an additional factor made the NFC games even more valuable to him. Trying to establish Fox as the fourth network, he and some of his key advisers saw the TV rights for NFC games as a potential cornerstone around which to build the network and expand into a number of major cities. For that reason, Murdoch was willing to bid substantially more for the NFC rights than CBS was willing to bid. Fox won out.
What’s Wrong with Perfect Competition as an Ideal:
When I was an active, rather than emeritus, economics professor and I taught my students about competition, I would start by asking them to name various kinds of competition. They typically came up with a fairly long list. It included advertising, service, location, guarantees and warranties, and additional features of a product or service that would make it more valuable to consumers, to name five. Occasionally a student would mention competition on price.
Then I would tell them that that’s how I think of competition also but that, if they read the chapter we were about to discuss, they would find the textbook author narrowing competition down to one variable: price. Moreover, I pointed out, even that was a little strange because for economists to regard competition as “perfect,” all the competition on price had to already have happened so that each seller was producing the identical product and charging the same price. I first came across the concept of perfect competition from a textbook by Paul Samuelson when, at age nineteen, I was taking my first course in economics. As I wrote in my book The Joy of Freedom: An Economist’s Odyssey, my first reaction was: “This didn’t seem perfect to me at all. It just seemed boring.”
But it’s worse than boring. It leaves out the essence of competition.
Read the whole thing.
READER COMMENTS
Maniel
Jan 9 2022 at 1:31pm
Prof. Henderson,
Thanks for the reminder regarding oversimplification. If price is my sole measure of anything, I will miss a lot unless I am truly adept at measuring prices (initial and recurring costs, “hidden” costs, sunk costs, depreciation, etc.). Along those lines, winning might appear to be a candidate for the perfect measure in competitive sports.
Under some circumstances, winning a sports competition can be highly satisfying as a confirmation of my investment in my sport. However, using tennis as an example, if all I care about is winning, I can simply choose a weaker player for my opponent. By contrast, if I care more about improving, I am better advised to seek out opponents whose game is stronger than mine. If I use that approach and I am fortunate enough to win, the victory actually holds some value. This is certainly true in professional tennis where just the right to enter a tournament is earned.
The concept of opponent selection can trip us up in team sports as well. On the other side of that argument is the idea that close cooperation within my team can give us the competitive edge. Likewise, companies which foster mentoring, cooperation, and teamwork are likely to find ways to improve, innovate, and compete effectively, even as measured by price.
Mark
Jan 9 2022 at 6:27pm
Except TV “rights” are actually not rights at all. Intellectual “property” is a BS proposition indignant of EconLib. IP should be abolished. There is no moral justification for them. This is all a fraud and it’s hard to imagine that people in the year 2525, or 25252 will still be paying for IP. All laws that are not natural laws will come to their end sooner or later.
Jon Murphy
Jan 9 2022 at 7:49pm
Two quick points
First: TV rights are closer to natural property rights than IP is. TV rights concern right of entry: who is allowed to enter the stadium, set up cameras, and use the stadium’s networks to broadcast to television. So, I don’t think the dismissal of TV rights as IP is fully justified.
Second: Whether or not TV and other IP is “BS” is irrelevant to the point of the blog post. The facts are that such rights do exist and are tradable. Consequently, we can use the tools of economics to analyze the results of the competition for such exclusive rights.
Daniel B
Jan 9 2022 at 9:44pm
I think a lot of the concern about “the lack of competition” when there’s few firms stems from beliefs about barriers to entry. E.g., “it would be very hard to create another YouTube or Facebook because of network effects, and that gives Youtube and Facebook market power.”
One way of responding to that stuff is saying that the fear of network effects and economies of scale doesn’t have a good track record. But in my opinion the problem is more fundamental than being unaware of the history of those ideas. I think many people are just like me and they don’t have a systematic, theoretical understanding of barriers to entry. I can’t help but feel like that response, despite being good, is missing something without that understanding. When I put the reply in my “it won’t convince the skeptics” detector it started making some noise.
In my cursory research on BTE I came across a Harold Demsetz article that I haven’t read (I tried skimming a sliver of it and I didn’t really get the economies of scale section). David, please collude with me to help me monopolize your EconLib posts market by heeding my request for a post on that article and/or whatever else you want to say about BTE 😉
Matthias
Jan 9 2022 at 10:16pm
Facebook itself was an up and coming social network in a field with existing competition.
Of course, social networking as a market has grown by leaps and bounds since Facebook emerged. So people tend to forget the networks that Facebook replaced.
Similarly for Google and web search.
Daniel B
Jan 10 2022 at 5:39pm
You’re right and I suspect that the dominance of companies like Facebook and YouTube will erode over time. The thing is, I suspect that the “track record” response you’re using can be improved to deal with more skeptical listeners. Even I never thought there would be a major competitor to Instagram, but TikTok proved me wrong. This is quite aside from substitutes to Instagram such as Reddit, Discord, DeviantArt and Twitter, and substitutes for those substitutes (e.g., if you’re using social media to interact with your friends, a substitute that fills that purpose is in-person interaction, Zoom calls, text message conversations, playing online games together, etc.).
I remember reading in Arthur Diamond’s Openness to Creative Destruction that incumbent businesses have a disadvantage with innovation. IIRC it’s because innovation depends more on inarticulate knowledge (e.g., trial-and-error experiments, hunches, accidental discoveries) than on articulate knowledge (e.g., the current dominant scientific theory).
The inarticulate nature of innovation makes it harder for incumbent businesses to innovate. Any “innovative” experiment they do has to be articulately defended to stockholders, but how can they articulate the inarticulable? Diamond notes this is a reason why a lot of innovative entrepreneurs self-fund themselves in the early stages of their ventures; the same articulation problem makes it difficult for them to convince others to fund them.
My point is simply that people are very hard to convince and that if a free market advocate like me wasn’t expecting a TikTok – despite knowing the track record of network effects fears – then why would critics? That’s why I want a stronger response than just appealing to the historical track record; I just can’t help but feel like it would be stronger if we had a systematic understanding of barriers to entry.
David Henderson
Jan 11 2022 at 5:55pm
Todd Zywicki, George Mason University Foundation Professor of Law emailed me this comment and allowed me to share it:
What a terrific essay.
I’d add one footnote that I think you’ll like and reinforces your story. Recall that 10 years ago it was WalMart everyone was concerned about. If you recall, the fear was that WalMart was going to come in, cut prices, drive out all the main street stores and then… I guess keep cutting prices? The whole story was bizarre because they never even tried to claim that it was a predatory pricing scheme… but I digress.
So what happened? We don’t care about WalMart any more because Amazon came along to provide competition!
And you know what company keeps Jeff Bezos awake at night (if any)? I’ll guarantee its WalMart–because WalMart can sell goods online too (anyone can) but can also offer the convenience of immediate pickup if that’s what you prefer. WalMart also figured out to sell groceries, which many people want to buy fresh, which gets you in the store.
And so what is Amazon doing? Starting to set up storefronts. Amazon lockers (so you can get goods in hours instead of days). Same day delivery on a lot of things. Etc.
So all it takes is two–Amazon put competitive pressure on WalMart to up its game in terms of innovation and Internet shopping. And now WalMart is pressuring Amazon.
The quote from Madden about three competitors being a “bonanza” is pure gold.
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