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Is Competition Always Good?

Policymakers must now acknowledge that healthy markets require competition among different business models, as well as along traditional dimensions such as price, quality, and innovation. Achieving this will require either more active enforcement or regulatory intervention.

CAMBRIDGE – Ask any economist whether competition is always a good thing, and the answer will be a resounding yes. After all, competition powers what the late William Baumol termed the “innovation machine” of the modern market economy.

Through competition, businesses spur each other to increase sales by serving customers better, whether by cutting prices, improving service, or offering innovative products. Innovation has driven the extraordinary improvements in health and quality of life over the past two centuries. And the world will need further creativity to solve pressing challenges such as providing low-carbon energy and transport or developing new vaccines and medicines to tackle the next pandemic or wave of anti-microbial resistance.

Competition is not the only driver of innovation, of course: publicly funded research and government regulation also are essential. But the contest among businesses is how brilliant ideas serving society are diffused at scale. There is ample evidence that strong competition is associated with higher productivity. Less encouragingly, studies also suggest that competition has diminished over time in the United States and other advanced economies.

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