Paradox of competition in economics names a model of a situation where measures, which offer a competitive advantage to an individual economic entity, lead to nullification of advantage if all others behave in the same way. In some cases the finite state is even more disadvantageous for everybody than before. The term Paradox of competition was coined by German economist Wolfgang Stützel. It is about a case of a rationality trap. Stützel distinguishes three categories of paradoxes of competition:
Circuit paradoxes
Classical paradoxes
Marx paradoxes
Examples
Advertising: the overall demand for detergent is assumed steady. By advertisement the individual venture can expand its share in market at the expense of its competitors. But if all producers of detergent do the same, their expenses for advertisement rise without gaining higher sales at large, so that profits even decline.
Opening hours: assumed the legislator extends the allowed opening hours by two hours. Now when an individual shop applies that new opening hours, 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 potential sales volume again allocates to all shops.
Wage policy: for each individual country counts: a state can improve its pricecompetitiveness in comparison with other states by a restrained wage policy. But from that it does just not follow that all countries improve their competitiveness when they apply restrained wage policy.
Currency devaluation: an individual state with own currency can achieve to lower overseas prices of its export goods by means of currency devaluation. All countries together in total cannot do so. If countries undersell each other with devaluations, the danger of currency war grows, consequence of which is a spiral of devaluation.
Partial sentence, Global sentence, lead and lag effect
Wolfgang Stützel analyses paradoxes of competition using the concept of Balances Mechanics. Specifically he defines and distinguishes validness which is valid for individual economic entities respectively individual groups, and validness which counts for the totality of economic entities. Concerning the pursuit of export surpluses he distinguishes as follows:
Partial sentence: Every country can achieve export surpluses by expanding its export. Every country can achieve export surpluses by reducing its import.
Global sentence: The sum of export always equals the sum of import.
On overall economy examination the benefit which individual economies want to achieve for themselves often appears as so called lead effect as against an inevitable lag effect of others. When lag effects are condoned, no paradox of competition arises. Solely because individual supply and individual demand turn out to be more elastic than overall supply and overall demand the classical paradox of competition can occur.
Literature
Peter Bofinger: Grundzüge der Volkswirtschaftslehre. Pearson Studium, München 2006.
Wolfgang Stützel: Paradoxa der Geld- und Konkurrenzwirtschaft. Aalen 1979.
Rolf-Dieter Grass, Wolfgang Stützel: Volkswirtschaftslehre. München 1988, p. 156-165.
