PARADOX OF COMPETITION

Paradox of competition in economics is a situation where different measures, which offer a competitive advantage to an individual economic entity, lead to nullification of advantage if all other entities 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 was coined by German economist Wolfgang Stützel.

Say we take a situation where a company is advertising their product, even though these advertisements cost money, it also helps increase revenue and therefore advertisements act as a competitive advantage for this particular firm.

Now, if the competitors start following the company in advertising their product, it would nullify the initial advantage gained by the first advertiser of the product.

Not only that, this increases the overall advertising cost of all the firms and would therefore cause a decline in the profits.

Similarly we can also take the example of a shopkeeper who keeps his business open for more hours than his competitors, now, when an individual shop is open for extra hours, even 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 overall ratio of sales volume still remains the same and the advantage is nullified.

We also notice this in students, who, to get into various colleges try to build up their resumes by, say interning at a company, this gives the student an advantage over other students as it boosts their resume, but when many other students start doing internships for the same reason, the importance and credibility of that is lost, so the particular student tries doing other extra curricular activities like sports, MUN’s etc, this adds a competitive advantage as long as he/she is the only one doing it, because when the same thing is followed by other students, the initial advantage is nullified.

This theory can also be applied in an instance where an individual state with their own currency can lower overseas prices of its export goods by means of currency devaluation. But when all other countries start doing this together, it isn’t possible and proves to be a disadvantage. If countries undersell each other with devaluations, the danger of currency war grows, consequence of which is a spiral of devaluation.

Paradox of competition is applied in instances such as restrained wage policy by countries to maintain competitiveness, restrained imports to maintain current account balance and Currency devaluation by countries to maintain their export competitiveness. All these policies could result in counteractions by others which result in Trade Wars, Currency Wars.