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Cell Phone Evolution 1973–2015
Numerous goods, including automobiles, televisions, air conditioners, dishwashers,
microwave ovens, and personal computers have gone through this same pattern. All were
highly expensive when they were initially introduced, but entrepreneurs figured out how to
produce them more economically and improve their quality, making them more affordable to
the overwhelming bulk of consumers. As we reflect on the role of both entrepreneurs and the
competitive process, it is important to recognize this price-quality pattern.
Producers who wish to survive in a competitive environment cannot be complacent.
Today’s successful product may not pass tomorrow’s competitive test. In order to succeed in a
competitive market, entrepreneurs must be good at anticipating, identifying, and quickly
adopting improved ideas.
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Competition also discovers the business structure and size of firm that can best keep the
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per-unit cost of a product or service low. Unlike other economic systems, a market economy
does not mandate the types of firms that are permitted to compete. Any form of business
organization is permissible. An owner-operated firm, partnership, corporation
(?)
, employee-
owned firm, consumer cooperative, commune, or any other form of business is free to enter the
market. To succeed it has to pass only one test: cost-effectiveness. If a business entity, whether
a corporation or an employee-owned firm, produces quality products at attractive prices, it will
profit and succeed. But if its structure results in higher costs than other forms of business
organization producing a product of similar quality, competition will drive it from the market.
Of course, competition also ensures that products of different quality can coexist so long as
some consumers opt for the differing quality/price trade-offs. A Mercedes can sell (at a high
price) alongside a lower-priced Volkswagen. On the other hand, the East German car marque
Wartburg and the Russian car marque Zhiguli were unable to survive without some form of
interference with market forces —as was common among communist countries that banned or
imposed high tariffs on imports from market economies.
The competitive process will also determine the size of firms in various sectors of the
economy. In some sectors—the manufacturing of airplanes and automobiles, for example—
firms will need to be quite large to take full advantage of economies of scale. Building a single
automobile would be extremely costly, but when the fixed costs are spread over many
thousands of units, the costs of producing each car can plummet. Naturally, consumers will
tend to buy from the firms that can produce goods economically and sell them at lower prices.
In such industries, small firms will be unable to compete effectively and only large firms will
survive.
In other sectors, however, small firms, often organized as individual proprietorships or
partnerships, will be more cost-effective. When consumers place a high value on personalized
service and individualized products, small firms will tend to dominate and large firms will have
difficulty competing. This is generally the case in the markets for legal and medical services,
gourmet restaurants, hair styling, and specialized printing. Thus, these markets are usually
dominated by small firms.
Paradoxical as it may seem, self-interest directed by competition is a powerful force for
economic progress. Dynamic competition among products, technologies, organizational
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methods, and business firms will weed out the inefficient and consistently lead to the discovery
and introduction of superior products and technologies. When the new methods improve
quality and/or reduce costs, they will grow rapidly and often replace the old ways of doing
things.
History abounds with examples. The automobile replaces the horse and buggy. The
supermarket replaces the mom-and-pop grocery store. Fast-food chains like McDonald’s
largely replace the local diner. Carrefour and Metro Cash & Carry grow rapidly while other
retailers shrink or even go out of business. MP3s and iPods replace CD players, which had
previously displaced cassette decks and record players. Personal computers replace
typewriters, and smart phones substitute for less mobile computer devices. One could go on
and on with similar examples. The great economist Joseph Schumpeter referred to this
dynamic competition as “creative destruction
(?)
,” and he argued that it formed the very core
of economic progress.
Competition harnesses personal self-interest and puts it to work, elevating our society’s
standard of living. As Adam Smith noted in The Wealth of Nations:
It is not from the benevolence of the butcher, the brewer, or the baker that we
expect our dinner, but from their regard to their own self-interest. We address
ourselves not to their humanity but to their self-love, and never talk to them of
our own necessities, but of their advantages.
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Taken together, private ownership and competitive markets provide the foundation for
cooperative behavior and efficient use of resources. When private property rights are clearly
defined and enforced, producers face the opportunity cost of their resource use. At the same
time, prices in open and competitive markets provide producers with a strong incentive to keep
costs low, cater to the desires of consumers, and discover superior products and better ways of
doing things.
It is important to note that competition is not “pro-business.” In fact, businesses do not
like to face competition and they commonly lobby for policies to protect themselves from it.
They will often seek to erect barriers limiting the market entry of potential rivals. As we move
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on to the analysis of regulation and the political process, examples of business behavior
seeking to reduce the competitiveness of markets will arise again and again. Indeed, the
problem of oligarchs managing to dominate markets for certain goods and services is
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