Intro to Econ: Seventh Lecture – Competition

Economists tend to think that competition between firms is a good thing. In fact most countries (all?) have some anti-trust regulation in some form or another. Anti-trust means against “trusts”, where trusts are here meant to be cartels (groups of firms) that collude especially by determining prices together and thus avoid competitive pricing. But how would competition improve matters in the first place?

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In praise of internet ads

On my recent trip to the United States my flight got canceled. The airline didn’t give any reason for the cancelation, offered no compensation for the resulting delay. Plus, my baggage was lost on the way, probably due to the fact that I was rebooked on a different flight involving two other airlines.

A week after the incident I noticed that a particular ad appeared again and again on my Facebook feed. It simply said “Flight delayed or canceled? Find out if you are entitled to compensation. We can help you start your claim for free.” So I clicked on it, even though I’m usually very skeptical of internet ads. The site behind the link looked reputable to me. I quickly googled “AirHelp fraud” or some similar phrase to see if there are any warnings or complaints about the company, but couldn’t find any.

So I decided to trust the site, filled out a simple online form asking me some details about my flight and uploaded a copy of my ticket. Within a week, I received a message that the airline had agreed to pay me 163 dollars in compensation. AirHelp charged 40 dollars in service fees. The whole thing cost me no more than 30 minutes of my time.

Two things I took away from this story: 1) Annoying as internet ads may be, they sometimes are really useful. Had I not seen the ad, I probably wouldn’t have bothered to contact the airline at all, and if I did, I would have spent hours on the phone talking to some customer service agent in India or, worse, some lawyer. Take this as an example that advertisement can create value for consumers. 2) The internet really does change the service industry profoundly. It’s evident that companies like AirHelp increase competition for service providers, especially highly regulated ones such as lawyering. We (or I, at least) used to think such services require a lot of local, personal interaction which the internet can never substitute for. It turns out more and more that this is wrong, which is probably bad news for lawyers and other service providers. More competition is always harmful for suppliers, hence the fierce resistance against Uber and Airbnb.

PS: I did spend hours on the phone talking to some customer service agent in India about my bag – but that’s a different story.

The Difference Between Healthy Competition and Monopoly

I’m currently doing some work on evolutionary economics without really having gotten far beyond the basics. I am certain this stuff is great and important, but all the books always kind of loose me at the point where too many “statistical moments” come in, I am asked to solve non-linear differential equations and I find myself spending most of my time reviewing how the rules of integration work. I’m terrible at math, is what I’m saying. But the book by Stanley Metcalfe on my desk at the moment still seems a really terrific introduction into the topic. What really fascinated me, however, is something only marginally related to the models themselves. Something so blatantly obvious when you think about it yet so cleverly hidden that I had never noticed it with this clarity. One of economists’ favorite words is actually nothing but a farce in most standard economic models: we speak of competition where there really is none!

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