Markets and Madness - 2007

July means that it's time for the OFA Short Course. I was planning to go as a visitor when I got a call from someone at OFA inviting me to be on a panel for a town hall session.
The topic was “Are We Cultivating Our Own Extinction?” and the description goes on at some length to bemoan the fact that we're a very competitive industry and that competition is hurting us. The description ends with the statement “Stop the insanity!!!!” Wow, lots of exclamation points. Somebody feels very strongly about this topic.
Since I have what will probably be the exact opposite opinion of the creator of the panel topic, I thought it'd be good to put my two cents in print before the program. My fellow panelists will have ample time to prepare their positions and skewer my main arguments.
This is a topic I’ve written about before, specifically when I was taking economics a couple of years ago. I was introduced to some unpleasant rules that govern our economy. The first states that competition is the basic regulatory force in pure capitalism. Sounds simple and not at all unpleasant. The bad part comes in microeconomics. The rule here is that in a perfectly competitive market, prices for goods fall to the marginal cost of production or the actual total cost of production. Selling for the actual total cost of production is better than the marginal cost of production because you get some return on capital. Are we a perfectly competitively market? Well, a perfectly competitive market is defined as a large number of producers in a market with a large number of buyers. It also requires that the producers sell products generic enough that one supplier’s product can be substituted with another. Does any of this sound familiar? It sounds very familiar to me. I am in a niche market that has now become close to perfectly competitive.
Based on these rules, most companies are breaking even. I really don't see any alternative to this fundamental reality. The market is an invisible force that doesn't care if you're sick or have a hurricane destroy your business. The market adjusts to supply and demand quickly and efficiently without individuals being able to control its course. This isn't necessarily fun for the people who have to compete inside the market space, especially when things go a bit wrong.
Retailers and suppliers live under the same tyranny of a freely competitive market. There are many things that businesses can do to make profits. They can differentiate their product offering to make it more attractive to consumers. They can increase the utility of a product to the consumer without greatly increasing costs of production. Consumers will always buy what they believe gives the best value for the money spent. Sometimes the plant sitting on the bench for an extra week is enough to make the value greater without incurring substantial additional costs.
It's also possible to take the path of being more efficient than the average producer. Under the Dutch auction model, where all plants are sold on the clock for more or less the same price, the producer with the lowest average cost of production earns the profit. I am seeing more and more Dutch producers following the American model of product differentiation and direct marketing to retailers as a path to greater profits. I think this is happening because anyone can invest in more efficient production over time while product differentiation requires a higher order of skill to achieve.
The above strategies describe how to be a more effective competitor. Being a less effective competitor equals lower profit or even real money losses. I don't think the market is insane; the market is completely unemotional. The market, like gravity, never sleeps. Unlike gravity, the market does change as consumers change their view of utility. Effective competitors identify and respond to consumers quickly and adjust their product offering accordingly. Someone once told me the definition of insanity was doing the same thing over and over again and expecting a different result. So really, what is the insanity that needs to be stopped (!!!!)? Well, I can tell you it’s not the competition in our industry.