Is Competition Always a Good Thing?
Risk is often involved in industry as companies attempt to gain an edge over their competitors. This becomes a part of the “regulatory game” between the government and companies. The authors of the academic paper above chose to investigate using mathematical analysis, how exactly competition changes the game.
They used the relationships between oil companies and government as the model for their analysis. The government has the option of spending or not spending money in order to enforce regulations, and the oil companies have the option to comply or not comply, changing their risk to shutdowns by the government and the occurrence of oil spills. Running a cost-benefit analysis within a one-company market and a two-company market they found that despite popular belief that competition can only help, it actually hurts. The competition between two companies intensified their inclination to take risks, leading to both companies becoming more likely to disregard the laws and regulations in order to stay one step ahead of their competitor.
I found this conclusion quite astounding as it’s not one that would be a common assumption. If this can be extrapolated to other industries as well, it’s a staggering insight into how probable it is that companies are following the industry regulations. The authors of the paper also mentioned this their “Further Research Directions” section, but I wonder if the same conclusion will be drawn with models where three or more companies exist within the market.
The conclusion also leads to the belief that the government should spend the money to check and regulate industries especially if the consequences of deregulation could be catastrophic to the environment, economy, or other important aspects in society. I’m sure that this conclusion will differ greatly from industry to industry, but an analysis of which industries are most likely to neglect regulation would be a very interesting read. There are certainly many more factors involved in the risk analysis of following regulation, but given all others constant, it is compelling to know that competition does not always breed things in the interests of the market.