How Market Competition Really Works

By Cameron K. Murray, an economist who specializes in environmental economics, regulation, rent-seeking, corruption, and property markets. Twitter: @rumplestatskin. Cross posted from Evonomics

One of the best models of competitive markets in an economy is an evolutionary one that embeds the ideas that cooperation and competition operating at different levels. The basic ingredients of the evolutionary approach are:

  • Variation – A process that varies inheritable traits at any reproducible unit (organism, tribe/colony, cell).
  • Selection – A process whereby the environmental conditions determine the reproductive success of a reproducible unit.
  • The result is a process of adaptation.
  • A firm (or any organisation) can be considered a reproducible unit.
  • The market and society as the environment which determines success and reproduction
  • Relative success matters for reproduction (firm growth and continued existence) rather than an absolute success.
  • Success depends on the local environment at each point time – there is no timeless correct way to do things, and there are environmental niches (sometimes temporary).
  • The success of markets in delivering efficient output is, therefore, the result of within-firm cooperation, and between-firm competition.
  • Without market level selection pressure, firms can become internally competitive, losing efficiency.

These ideas might make more sense with an example.

The Core Approach 

Imagine that within a firm every interaction amongst employees can be either cooperative, which results in improved production efficiency, or competitive, which helps one of the individual employees (conditional on the other being cooperative), but reduces the overall efficiency of the firm.


It might be as simple as employees wasting resources blaming others for failures rather than working together to get an efficient outcome, or it could be as competitive and nasty as sabotaging the work of others in the firm to make yourself look good, which might be good for the individual, but bad for the company.

Perhaps the example of Amazon can help get your mind around this idea:

At Amazon, workers are encouraged to tear apart one another’s ideas in meetings, toil long and late (emails arrive past midnight, followed by text messages asking why they were not answered), and held to standards that the company boasts are “unreasonably high.”
The internal phone directory instructs colleagues on how to send secret feedback to one another’s bosses. Employees say it is frequently used to sabotage others. (Source)

The table below shows the stylised conflict between individual choices to cooperation or compete within a firm. For two people (A and B) who randomly meet within a firm, they can both cooperate and earn an individual payoff of 10 each (top left cell with A, B individual payoffs listed), giving the firm an overall payoff of 20. Or, one person can ‘defect’ while the other cooperates, giving that person a payoff of 15, but only a payoff of 0 for the cooperator, and an overall firm payoff of 15, which is lower than if people were cooperating. And the bottom right cell shows the payoffs if both people are competitive (the defect from cooperation), giving each a lower payoff of 5, and the firm a payoff of 10 (the sum of both people’s payoff).

Clearly, the best thing within a firm is for all interactions to be cooperative to get the highest total firm payoff, but there remains an incentive for each individual within the firm to occasionally defect and get a higher personal payoff.

Now, let’s think about market competition operating at a firm level. With more competition, would we expect the evolution of market to result in the success of more competitive individuals?

The diagram below shows a serious of three selection stages over rows from time one to time three. Each small table is an environmental or market niche, and each colour represents a single firm. So in the top row there are four firms (blue, green, yellow and orange).

Each small table shows in column N the number of cooperators or defectors within the firm. So in the top row blue table, there are 20 cooperators and no defectors in the firm. The next column, P, shows the average payoff to each person from random interactions amongst other firm staff. In the top row of the blue table the average personal payoff is 10 because all 20 staff are cooperators and every interaction with another cooperator in the firm gives a payoff of 10. The total firm (or group) payoff is in column G and is 200 in this instance (20 people getting a payoff of 10 each).

The next firm in the top row in green has within it 15 cooperating staff, and 5 defectors. The average personal payoff for the cooperators in that firm is 7.5 because they have a 1 in 4 chance of dealing with a defector, and a 3 in 4 chance of dealing with another cooperator. The defectors have a higher personal payoff of 12.5 for the same reason.

Moving across the top row, the yellow firm has 10 cooperators and 10 defectors. This firm is a nasty place to be, and half the time the firm is busy with staff blaming each other and not producing efficiently. The payoff (or total efficiency) for the firm is much lower, at a total of 150.

The last orange firm is mostly defectors, perhaps an extreme version of our Amazon example. The total payoff for this firm is just 125.

Outside these tables on the right side is a column N, which is the sum total of the number of people who are cooperators or defectors in each time period. In time one there are 50 cooperators amongst the firms (20 in blue, 15 in green, 10 in yellow, and 5 in orange), and 30 defectors.

Moving from time one to time two, or going down a row, is a selection stage in the competitive evolutionary game of market competition amongst firms. That is, only the most efficient firms survive, and the least efficient die off from lack of customers from their poor value products made inefficiently. In fact, in this example, the most efficient firm expands to take up the market niche left by the firm that dies off.

So when we move to the second row in time two, the least efficient orange firm has died off, and the most efficient blue firm has expanded to satisfy that market niche.

But notice this. When we add up the total cooperators and defectors working in all the firms in the market at time two, there are now 65 cooperators (15 extra), and 15 defectors (15 less), compared to time one. That is, competition at the firm level has led to the selection of the most internally cooperate firms to survive, not the most internally competitive. Going down one more row shows the new relatively least efficient yellow firm also dies off. Thus, what works at one point in time does not work at all points in time, and success in this game is only relative to others in the market environment.

The economic lesson from this simple example is that competition is good when it provides a selection mechanism that favours cooperative and efficient groups (or firms) that enable total production to expand. Variations that improve efficiency and cooperation within firms will, over time, be selected for by consumer choices in the market.

Within-Firm Competition with External Costs

Let us now think about larger firms that have multiple departments making multiple products with a variety of different customers. We can also think of large bureaucracies in general, including government departments. Perhaps the above example has led you to think that competition within company departments might be a good way to select for the best ones. Unfortunately, this approach has a huge incentive problem, as the relative success of one department might be due to passing off costs to, or sabotaging, another. Thus, within-firm competition that results in an evolutionary selection process is very risky, and it is well known that ‘silos’ in firms can results in conflict between what is best for each silo, and what is best for the firm.

Unfortunately on most occasions, silos encourage behaviours that are beneficial to the occupants of the silo, but are often not in the best interest of the overall business or its customers. It also plays into the hands of corporate politics, since silos help to keep things private. And we all know that in office politics information is power.
 A recent survey from the American Management Association showed that 83% of executives said that silos existed in their companies and that 97% think they have a negative effect. (Source)

I capture the idea of sabotage, or passing on external costs to other departments, in the table below. Here the company has two departments (each small table), and within each department there is a choice to cooperate on either project A, which provides that department with a payoff of 20, or project B, which provides a payoff to that department of 10. However, project A comes with an external cost to the other department of 15.

For each department it is better to cooperate on A, giving them 20 each, but also inflicting an external cost of 15 each. The overall company payoff is just 10 in this situation. However, if the departments each cooperate internally on B, the overall firm payoff is double, at 20, as there are no other externalised costs.

Thus, for large organisations, the emergence of silos that are blind to the situation of other parts of the company may end up with a choice of projects and investments that are not overall optimal and efficient. Companies that find ways to ensure they maintain this inter-departmental efficiency as they grow are those that the market will select for.

Notice that this problem is a much more serious one in governments where there is no government-level selection pressure. At best there is an occasional change of government in a democracy, but rarely does this provide strong incentives to change operational processes all that much.

Indeed, the incentive to sabotage other groups and inflict costs on them also arise with market competition in general, and as such, provides a strong basis for competition laws and intervention where negative externalities from the activities of certain firms exist.

Muir’s Chickens

The lesson here about market competition acting as a selection mechanism to favour firms that have high within-group cooperation is radically displayed in the experiments of William Muir, who bred chickens and either selected for a) the most productive individual egg-laying chicken, or b) the most productive cage of egg-laying chickens (in each cage were 9 chickens).

The results drive home the message of group selection is a process that increases the number of cooperators and total efficiency.

The first method favored the nastiest hens who achieved their productivity by suppressing the productivity of other hens. After six generations, Muir had produced a nation of psychopaths, who plucked and murdered each other in their incessant attacks. No wonder egg productivity plummeted! In the second approach, he selected the most productive groups and because they were already a group that worked well together, they included peaceful and cooperative hens. (Source)

Egg production by the cooperative cages increase 160% over just a few generations. More detail here.

Originally published here.

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  1. PlutoniumKun

    I was reading last night a review of the book Inadequate Equilibria on the Slate Star Codex blog which explores many of the same ideas in more detail (I haven’t read the book yet, but the review linked gives I think a very good summary of the ideas).

    These ideas aren’t news to the NC commentariat of course, but its striking at how most of this is pretty well known to anyone how has dug past a basic intoductory model of economics into the underlying assumptions – but it has almost entirely failed to penetrate mainstream thought. I’ve met plenty of left leaning people who still buy into a fairly crude ‘competition increases efficiency’ assumption. I would blame the malign efficiency of the right at propogandising their ideas, but it also reflects a terrible failure of the left leaning intelligensia that they have allowed so many false ideas to get a hold of the narrative.

    1. Norb

      David Grabber underscores your point in his essay, Hope In Common. The power of TINA and the lack of imaginative alternatives to the current economic predicament is due to fear constantly generated by those wishing to maintain the status quo.

      The essay attempts to clarify terms that have been made opaque in order to foment this fear. One important point is that Hopelessness is not natural. Hopelessness needs to be produced. Another is that communism already exists. As portrayed by the Right, communism is a failed system that cannot work. However, in order to get anything done in the real word, people have to cooperate and want to achieve certain goals. Every day, people act in solidarity to produce outcomes in the world. Communism, if understood as people’s actions directed by- from each according to their ability and to each according to need- is really how the world works.

      The idea is how to manage communism. You can use Authoritarian means, which capitalism is just one aspect of authoritarianism, or you can democratize the management. Capitalists hate real democracy. Just look at the sham Democratic party in America.

      Another point Graeber makes, and is often repeated here at NC, is that under no circumstance can alternatives be allowed the appearance of “winning”. Winning as defined as alternative social organization that does not pit individuals against each other.

      Movements have to dispel fear, and rally solidarity- connected to concrete ways of making a living.

      1. nonclassical

        …interestingly, the graphs – alternatives mimic “Subliminal Seduction”, book used 70’s-80’s Poly Sci to explain advertising “propaganda”…pocket book was $1.95 at that time, today on Amazon, often over $100.00…bought one recently when popped up at only $11.00…

      2. John Rose

        Since the term “communism” has been so successfully demonized by the plutocrats, I suggest sticking to a word you did use, finally, “solidarity.”

    1. visitor

      Cartels demonstrate that cooperation is quite efficient — if by efficiency one means maximizing profit for less effort expenditure. And externalities contribute to make firms extremely efficient in that respect.

      The prime example of a firm that adopted an “internal competition” model — and that faces its imminent demise is of course Sears.

    2. ambrit

      Question is, how well does ‘in-group’ co-operation ‘scale?’ Do sociopaths co-operate well?

        1. Self Affine

          The payoffs and enforcement mechanisms have to scale properly. That’s not usually the case in modern corporations. The inequality with respect to money, power and privilege from top to bottom is extreme.

          The Costra Nostra solved that organizational problem via an enforcement mechanism that isn’t really available to corporations (as far as I know).

          And its really not as simple as cooperating only. The corporation also has to have other learning and innovation mechanisms in place as well as access to the right resources and internal processes.

          Sure cooperation is essential, but if the other guys have a better team and/or have constructed their business niche more intelligently its a problem.

          1. Norb

            With modern corporations, the “whacking” has just evolved into a more socially acceptable form, namely destroying the environment and destroying individual lives by denying job opportunities. These actions are possible because individuals have internalized blame for their own failure. It’s their own fault, not the violent institutions or the corporations.

            All this points to the power of systemic violence. Violence is very persuasive and long-lasting. Give me a peaceful, cooperative society that can defend itself against the pathological killers.

            When movements/alternatives form that can deliver peaceful security, the rest will fall fairly quickly.

            Corporations have evolved and grown to the size and influence of Nation States. But the power and influence that brought them to that position will be their undoing because they cannot effectively govern a population. They are based on predation, which does not support a cohesive society.

        2. nonclassical

          …which indicates how (JP Morgan) Wall Streeters, from beginning, had no intention of allowing actual competition…monopoly, insider trading only…today, financialization of U.S. economy..

    3. Adam1

      Your comment makes me realize that it’s equally important to clarify what the intended output being produced is. I worked for a firm once that was horribly toxic in nature. Most of the non-senior management worked damn hard and extremely cooperatively to make the firm work, but the sr. management was working to maximize their bonuses and please their masters which continually lead to resource reductions.

      On a macro scale you can see the elite are only interested in producing piles of dollars even if it means destroying true national wealth while the 99% scramble to make a living and sadly watch the wealth destruction going on around them (and convinced/propagandized that its other workers/peoples fault).

    4. nonsense factory

      Exactly. This also applied to ecological models, as opposed to the overly simplified evolutionary model described in the article. In the ecological sciences, which deal with populations of organisms (rather than the evolutionary history of organisms), such efforts to apply simple evolutionary fitness & competition models have failed to predict ecological outcomes and were abandoned over 50 years ago. This is why it makes far more sense to take the ecological approach – where we see that competition, cooperation, and random drift (accident) all play roughly equal roles in determining outcomes (what populations survive and thrive, and which do not).

      As far as the myth of “free competitive markets” that underlies the neoclassical economic theory that rules academia today, see Ha Joon Chang:

      Today, most markets are populated, and often manipulated, by large companies. Some of them are the only supplier (monopoly) or more typically, one of the few suppliers (oligopoly) – not just at the national level but increasingly at the global level. For example, Boeing and Airbus supply close to 90 percent of the world civilian aircrafts. Companies may also be the sole buyer (monopsony) or one of few buyers (oligopsony).

      …Oligopolistic firms cannot manipulate their markets as much as a monopolistic firm can, but they may deliberately collude to maximize their profits by not undercutting each other’s prices – this is known as a cartel.

      …Monopsonistic and oligopsonistic forms were considered to be theoretical curiousities even a few decades ago. Today, some of them are even more important than monopolistic and oligopolistic firms in shaping our economy, Exercising their powers as one of the few buyers of certain products, sometimes on a global scale, companies like Walmart, Amazon, Tesco and Carrefour exercise great – sometimes even defining – influence on what gets produced where, who gets how big a slice of profit and what consumers buy. – Economics: A User’s Guide

    5. nonclassical

      …zactly…JP Morgan = “robber barons” stated they had no intention of level playing ground or “competition”..U.S. back there again.

      Ayn Rand “assumed” level playing ground, ideologically, but had no intention of proposing or enforcing said interaction, which has no history of action other than government oversight, transparency, accountability….none of which apply today..

  2. ambrit

    I was just perusing my local craigslist jobs section and came across this “ad” from Home Depot.
    Essentially, the corporation wants to become a gatekeeper for jobs for skilled and semi skilled construction workers. How altruistic. Oh wait. Now I see it. The ‘chosen ones’ would tend to buy all of their materials for most if not all of their jobs, from the emporium, whether Home Depot affiliated or not. A simple survival mechanism if one’s livelyhood depended even in part on a supplier who could also supply job references. Want to bet that ‘extra’ price increases are ahead for HD products? (Simply to offset the ‘extra’ effort needed to carry out the civic minded jobs program, of course.)
    I wonder if there’s a manufacturing niche for designer tinfoil hats? I sense a cunning plan aborning.

    1. JTMcPhee

      I’ve had Home Depot “skilled professionals” bid on three projects around the house. Stuff I can’t do myself. The people who came to the house were parodies of the well-trained salesman type. One offered that his credential training was actually in “communication” (propaganda, marketing and sales), and because I am maybe overly courteous in person, I let him go on for a couple of hours and gather and input all my personal data and even talk me into applying for a store credit card (there’s a sucker born every minute). Finally the smarm got to be too much, and I pretty unceremoniously bundled up his paperwork and presentation case and laptop and showed him to the door, with him still trying to ‘overcome my sales resistance” and “defeat my objections” the whole time…

      The bids for those projects were 25 to 50% over what others (also seeking to maximize profit, of course) offered. So you have “trained salespeople” seeking commissions and spiffs fronting for mopes who do the work and get paid maybe not very well but have a sort of ready stream of work — until the larger populace figures out (from social media and internet reviews) how the scam works. “Independent” HD contractors, many of them doing the same crappy work that a whole lot of “contractors” do, very little apparent effort by HD at quality control or customer satisfaction if you read the complaints. And yes, anecdotal successes reported by some of us “consumers” in transactions with HD, but a whole lot more crapification, to be parlayed into corporate self-trumpeting by the marketers that slave for HD. One wonders, in a society of liars, how any of us can “trust” any of the others of us, since even the ratings and comments for things like Amazon and likely HD are pushed and stacked and seemingly bot-generated, all by the work of people just doing their jobs and looking for angles, to praise the great corporations…

  3. The Rev Kev

    The imagination boggles as to the thought of two infantry battalions opposing each other in combat – one operating on cooperative behaviour and the second on a competitive basis. Can you imagine what it would be like in the later battalion? Would promotion be based on “fragging”? Would companies in them compete to the point of sabotaging each other in combat? Would soldiers in that battalions always be having to watch their back and be having to watch their gear lest it be stolen or something would “happen” to it? It would be a massacre. That is why the military, though a hierarchy, has a core of cooperative behaviour. If this is true for the military, then why should it have to be different in the commercial world. And don’t try to say that that is just the way it is. I recall Japanese firms embracing cooperative behaviour in their heyday and wiping the decks with their competition.

    1. JTMcPhee

      …and after the Japanese corporate heyday, what happened with all that “cooperation?” The mandated calisthenics, the regimentation, the drive to grow and “succeed?” Leading to ‘death by overwork’ and similar dysfunctions? Where’s a model that can sustain long against what seem to be instinctual human behaviors that are shall one say ‘less than cooperative”? There has been a hierarchy in Japan for a long time, an oligarchy too. Japan, Inc.’s “success” against “Western” dysfunctions like Chrysler and Motorola and such was born of what conditions, exactly?

      1. Norb

        Japan and China where “closed” societies before they were forcefully pried open by the exploitive western nations. In the long term, not such a good idea. The power of the people turned on its head- Western individualism swamped by the Asian Hoard once again. Communist China is a twofer on the irony front.

        In the end, it comes down to how to defend your way of life, both for individuals and for nations. Maybe in our lifetimes, we will see some major shifts in thinking and action.

        Peace, love, and cooperation are the strongest forces in the world. Either that, or we are just bumbling our way through the world- until we aren’t.

      2. The Rev Kev

        That is the stuff that the west fixates on. In earlier times it did things that we don’t do in the west. An example I read about. A Japanese company would hold a company-wide meeting to see where the company is at and where it needs to go. First, they ask the janitors. That’s right, the goddamn janitors. After that, the line workers, then the supervisors, lower management, upper management and then the executives. By the time they got to the big boss, don’t you think that he had a damn good idea about where exactly his company is at and so could make a better decision?
        Another example – a Japanese company would meet financial problems. To solve this first the big boss takes a pay cut, then the executives, then upper management, and so on. Can you imagine if we had been doing that here in the west? Unfortunately for the Japanese they have been adopting western business management ideas and all the stuff that MBAs have been taught. Japan has always had a lot of problems but they had some good ideas.

  4. TomDority

    As seen in our last great depression, it was the game plan for everyone to take advantage (compete) with everyone else by treating housing as an appreciating asset …… to be sold to the next fellow at a steep toll and to be got off ones hands before it began to burn. Of course, this was all fueled by easy credit and pumped by Realtors and institutions driven by greed is good …..IBGYBG… the smurfs and Ninja loans. How does this play out in the above tabulations…probably well.
    One legacy is the current high cost of living and rent extraction that causes the host country to be non-competitive, extreme inequalities in income, a misguided theory of survival of the fittest. Etc.
    One of the structural/legal/political legacy produced..IMO. Is the story that ‘no-one could of seen it coming’ used by the perps to escape jail time. It either that or these same folks claiming to do gods work are complete idiots that still run things……never give psychopaths the benefit of morality or an excuse for their actions
    Good article starting to get past the fringes of our society ills and ‘reasons’ why we can’t turn the boat around to save ourselves on this planet

  5. Thuto

    It’s interesting that the author’s line of argument is analogous to evolutionary biology because its motto, “survival of the fittest” informs the default modi operandi for people entering employment with ideas of sink or swim (and drown your competitors while you’re at it) type of competition already deeply ingrained in them by a society that gives individual “victors all the spoils”. In other words, firms don’t exist in a vacuum but as part of a larger societal system, and if the larger system is set up to visibly reward those that “rise to the top” (within and outside firms), flicking the switch that turns off this instinct to compete in service to the market ambitions of the firm can be a rather challenging proposition for all but the most “economically pious” people.

    Further to this, the incentive structures within firms (promotions, individual performance bonuses, “employee of the year” type awards etc) mirror the dominant narrative embedded within the collective psych of the larger societies within which firms must exist and operate, and said incentive structures promote competition over cooperation.

    Anyone who’s run the precarious gauntlet from middle management to the c-suite within a large firm can attest to the “need” to temporarily set aside all cooperative instincts to adopt a “the end justifies the means, nice guys finish last” hyper competitive mindset. As PK alludes to in his comment, the left leaning intelligensia have been culpible in allowing the dominant “compete or die” narrative to propagate, to the detriment of us all (except the victors who espouse the virtues of ruthless competition from atop the piled up bodies of those they’ve thrown under the bus to reach the top)

    1. readerOfTeaLeaves

      As PK alludes to in his comment, the left leaning intelligensia have been culpible in allowing the dominant “compete or die” narrative to propagate, to the detriment of us all (except the victors who espouse the virtues of ruthless competition from atop the piled up bodies of those they’ve thrown under the bus to reach the top)[italics mine]

      If you put ‘The Spirit Level’ into the NC search bar, you’ll bring up a host of posts with themes that help explicate the main message of ‘The Spirit Level’: once you pass beyond a certain level of inequality, the whole environment/system degrades. And because we are social creatures, that proves catastrophic over time. For *every* member of society.

      ‘The Spirit Level’ was written by epidemiologists who stumbled onto data about inequality — across nations — that revealed statistically strong relationships between the health of individuals and the health of communities; inequality was a quick-and-powerful x-ray of social and individual health.

      One of the problems ‘the left’ has had — and I agree with you that Plutonium Kim nails it — is a failure to explain how rampant inequality (i.e., destructive competition that degrades the business and social environment) makes everyone less healthy.

      That’s what ‘the left’ really needs to hammer: if you live in a very unequal, competitive society, you-and-yours will never, ever be as prosperous as if you lived in an economically more cooperative, more productive culture. The cooperative, more egalitarian culture is — statistically — better for your health.

      It’s encouraging to see a post that shows cooperation is not only better for your health, it’s better for your bottom line. People struggling to pay their employees well and treat them fairly should find this kind of research to put a fair wind in their sails ;-)

      1. Thuto

        “For *every* member of society”.

        If only the elites didn’t naively believe that they’re insulated from all the destructive effects of rampant inequality (which they fight tooth and nail to preserve). I agree with you of course, living as I do in one of the most unequal societies in the world, which affords me the opportunity to observe this “let them eat cake, blame the victim” mentality on a frequent basis. Doom’s day prepping? Check, I’ve got that bomb proof bunker with a year’s supply of necessities. Health? Check, I’m wealthy enough to have a personal trainer and eat only organic. Security? Check, I’ve got a security detail to rival that of a leader of a small country….

        I’m sure you can see where i’m going with this, they really do believe that they’re insulated from the effects and, here in South Africa at least, they threaten to emigrate to Canada/New Zealand/UK/Australia whenever this bubble thinking is shown up to be fallacious.

  6. Andrew Foland

    Is there an empirical basis for the various payoff matrices in the post? Even for their structure?

    For instance, is there an empirical basis that internal competition has a Prisoner’s Dilemma structure?

    1. Anonymous

      Another illustration from the same enterprise, in this case an “internal competition” between the objectives of management and the agendas of individual workers.

      Bespoke products were being produced to customer specification. Occasionally a product would be finished and put into the shipping warehouse without that fact registering on the company’s internal tracking systems — such items would remain in an “in process” status until they were flagged because they were taking too long to be marked as “complete/ready to ship”. A lot of effort would then have to be made to locate the finished item so that it could be shipped. This was damaging to the company because unnecessary shipping delays needlessly antagonized customers and often led to additional costs for expedited shipment of the late product.

      We discovered that there was an appreciable rate of human error in a very simple production process function, and implemented a straightforward method of testing for this error. The procedure alerted the workers responsible for receiving finished goods into the warehouse to the presence of an error and prescribed a simple corrective procedure.

      Unfortunately, the problem of finished custom items getting untracked into the shipping warehouse persisted. The error detection/correction software was modified to create a transcript of the received-from-production transactions in the hope that this might shed light on the problem and we discovered that the corrective procedure was being circumvented by a number of workers who did not want to implement it. Evidently, they found the corrective procedure to be tiresome and preferred to avoid it. The amount of time saved by the circumvention was trivial, at most a few minutes per day, and these workers were not being pressed hard. It was very disheartening to encounter this attitude.

      Aligning the incentives of different agents in complex organizations is hard. I don’t have answers, though I suspect that worker-owned and -managed cooperatives might be better at it than this enterprise was.

      1. Enquiring Mind

        Imagine a modified Prisoners’ Dilemma. Participants are given appropriate instruction. They perform some internal process and take action. In the meantime, other actors operate via different rules, or no rules.
        When the Participants see their results, they chalk those up to the rules of the game.
        Then the other actors count their take, three pence all the wiser.

  7. shinola

    I read this article twice just to make sure I didn’t miss something.

    So, take a well known social concept, assign some random numerical values to create some semblance of an “equation” and, as an added bonus, stuff it into a matrix.

    I am reminded of why I dumped econ. as a major in my senior year.

      1. allan

        Two recent tidbits concerning who exactly this science is hard on:

        Equal but Inequitable: Who Benefits from Gender-Neutral Tenure Clock Stopping Policies?

        Kelly Bedard, Department Chair and Professor of Economics, University of California, Santa Barbara

        Having children may reduce the probability that women are promoted in a variety of professions because early productivity falls despite the existence of short family leave programs. But the problem may be particularly acute at research-intensive universities where research productivity before the tenure decision is especially important. In response, many of these institutions have adopted gender-neutral tenure clock-stopping policies so women—and men—do not have to sacrifice family for career, and vice versa. The extra time on the tenure clock is intended to account for the negative productivity shock associated with having a child. While these policies are equal in the sense that they give the same benefit to women and men who have children, they are inequitable in that the time cost (or productivity loss) experienced by men and women is quite different. Using data from top-50 economics departments from 1980-2005, Kelly Bedard shows that these policies raised male tenure rates while at the same time reducing female tenure rates.


        National hiring experiments reveal 2:1 faculty preference for women on STEM tenure track

        Authors: Wendy M. Williams, Stephen J. Ceci

        Male and female faculty revealed a 2:1 preference for hiring women across both math-intensive and non-math-intensive fields, with the single exception of male economists, who showed no gender preference. …

        Not a gender preference, but a revealed preference.

    1. oh

      Whenever an article applies supposed payoffs and outcomes in a matrix to explain simple actions, it makes me leery of the article. Too much fluff!

      1. readerOfTeaLeaves

        It might be better presented as an animation.
        The point that ‘one instant in time is not informative’ is key, and that may best be presented via video or animation.

    2. lyman alpha blob

      Thank you – I had the same thought myself. Where did the author come up with the number 10 to assign to those who cooperate? Seems rather arbitrary without any explanation but of course it causes the results to fit his argument. How convenient.

      Cooperation would seem to produce better outcomes than competition in most cases however this article doesn’t exactly prove it.

    3. Jamie

      You’re a better person than I, for I stopped reading after the third paragraph. This is “bad” science. Take a paradigm you find attractive and try to shoehorn reality into it. Start by defining cooperation as productive and competition as counter-productive, but be careful not to acknowledge any examples of productive competition or counter-productive cooperation to muddy your definition. (I’ve seen plenty of both, but these apparently don’t exist in the poster’s reality.)

      And just so you know, I am a huge fan of ecological economics and a fierce critic of the over use of competition for social ends, but still… there has to be some modicum of rationality applied.

      1. Thuto

        I can think of cases where healthy competition can indeed be productive in reining in behaviours that could be harmful if left unchecked (e.g. price gouging) by the prospect of a competitor capitalizing on a firm’s missteps. Apart from cases of cartel like behaviour, can you supply an example/s of counter productive cooperation (i.e. where the intent was not directed at clandestine acts of corporate malfeasance like collusion, but rather the cooperation was driven by good intentions but the outcomes were counter productive)??

  8. Anonymous

    I suspect that in many instances there really is a kind of “prisoner’s dilemma” structure to the consequences of internal choices to compete/cooperate.

    I’ll give a single example that is informed by my own observations:

    Small companies are more resilient to shocks such as staff departures or illnesses if key functions can be performed competently by more than one person. So, for example, it would be good for key supervisory personnel to train their subordinates/assistants to be skilled in the performance of the supervisors’ duties so that company operations are not impaired if a supervisor becomes unavailable.

    In my experience, some supervisors were reluctant to up-skill their subordinates, seemingly on the theory that if they were the only people who could perform certain key functions, their jobs would be more secure. The company had a low quits rate and competitive pay, so there wasn’t a strong objective ground, as far as I could tell, for this anxiety. Still, it was hard to get the key people to cross-train subordinates, and we did have occasions where key personnel left for better opportunities and the lack of prior cross-training hurt the enterprise.

    In at least this case, there was a “prisoner’s dilemma” style structure to the payout matrix, though the individual benefits of defection were in this case, I suspect, entirely subjective while the costs to the enterprise of individual defection, and the benefits of cooperation, were concrete.

  9. diptherio

    competition at the firm level has led to the selection of the most internally cooperate firms to survive, not the most internally competitive.

    Here’s some empirical evidence to back up the model outcome:

    Cooperative businesses have lower failure rates than traditional corporations and small businesses, after the first year of startup, and after 5 years in business. About 10% of cooperatives fail after the first year while 60-80% of traditional businesses fail after the first year. After 5 years, 90% of cooperatives are still in business, while only 3 – 5% of traditional businesses are still operating after 5 years. This is often because of the many people involved in starting a cooperative and the high level of community support for cooperatives (World Council of Credit Unions study in Williams 2007).

    1. Self Affine

      The payoffs and enforcement mechanisms have to scale properly. That’s not usually the case in modern corporations. The inequality with respect to money, power and privilege from top to bottom is extreme.

      The Costra Nostra solved that organizational problem via an enforcement mechanism that isn’t really available to corporations (as far as I know).

      And its really not as simple as cooperating only. The corporation also has to have other learning and innovation mechanisms in place as well as access to the right resources and internal processes.

      Sure cooperation is essential, but if the other guys have a better team and/or have constructed their business niche more intelligently its a problem.

      1. JTMcPhee

        Karen Silkwood? Jock Yablonski, Go look at what’s shaking in Nigeria, and Honduras, and the Amazon Basin (the geographic area, not the retail cesspit). “American” and many other supranational corporations are busy killing a lot of people, via assassination, “direct action” and of course by poisoning or “purchasing” their environments…

        As Maj. Gen. Smedley Butler pointed out, after a career as a thug enforcer for “American” corporate interests, most of what “our” government does in the way of muscular foreign policy is kill people in service to a giant extortion, extraction and protection racket.

        In wandering search-space to encounter the above links, I came across the following:

        “Killing Corporations: The movement to revoke corporate charters has gotten its history confused,”

        Corporations do disappear from time to time, even great big ones, like Westinghouse and Sears. Most of those events are not sub judice but a result of successful predation or failed “business models” or larger world events. But as the article points out, there are “legal means” of achieving “corpocide.”

    2. Self Affine

      An interesting aspect of this article it that it quotes its own contradiction immediately by referring to Amazon.

      Unless of course we conclude that Amazon is not a successful predatory and competitive corporation and has reached monopoly status. The same can be said for Google and Facebook.

      The economy is not a level playing field and this article assumes a pretty simplistic equilibrium starting point which does not reflect our current reality.

    3. Norb

      As always- really great stuff. The growth of cooperatives is the only thing that gives me hope. I’m nearing retirement in my own working life, and in that time have worked for a total of 3 small companies whose business philosophy has always been on the cooperative employee model and fair pay. They were not coops, but family businesses that rewarded loyalty and hard work.

      It seems, in the proper work environment, a core group of people make the business a success. This core group must come to some sort of understanding on pay and responsibilities that lasts over time. If that balance is lost, the business fractures. Only businesses offering a standardized product can abuse their workforce.

      I think this lesson scales up to towns and small cities also. The future will be the reintegration of small business into the larger community, acting in mutual support. It’s the only way to successfully survive the churn of business activity and to minimize negative disruption.

      Coops represent the Shock Doctrine for the left- or anyone wishing a more democratic and fair society. As large enterprises fail, more opportunity will arise for such organizations to take hold and spread. Whenever possible, I always recommend younger people to consider seeking out employment with a coop.

  10. Norb

    The company I work for recently set up an employee benefit program that consists of each employee receiving 25 dollars a month, to divide as they see fit among fellow employees as bonuses for exceptional effort. ( It use to be 50 but was cut back) The only rule is that you cannot award the entire 25 to one employee. The results are tallied and the employee who receives the most votes is awarded, along with the original money, employee of the month, 100 cash, and 1 extra day of vacation.

    It has been interesting to watch how even this simple system is gamed over time. The intent of the program is to reward and build cooperation, but in the end, only serves to undermine it- if only for the bad feelings it tends to generate. It is an attempt to force something that needs to occur thru personal leadership and natural occurrence. Successful teams of people cooperate and become more efficient and productive as they hone those cooperative skills and processes. It is the external predation on group productivity that needs to find balance. How that balance is achieved determines the nature and character of the greater organization.

    It seems cooperation cannot thrive in any system where the game is rigged or is allowed to degenerate due to loss of focus on a greater good. Individual schemers only bring systems down- weaken them.

  11. TarheelDem

    There are emergent effects of hierarchy that cause the entire view of upstream hierarchy pieces to appear as a single unit (or single competitive or cooperative player).

    The strict binary division between cooperative and competitive only operates at the level of a transaction. Effects on production efficiency, whatever that is, are responses to the aggregate of transations, either cooperative, competitive, or something else.

    One of the current issues with economic theory is the operational definition of production efficiency. It seems to be copied from physics and hauled out as a valued or normative club to use rhetorically. Another similar rhetorical club is “incentive”. We intuitively think we know what these mean but generally these words function to put a finger on the scale to preserve the status quo arrangements.

    It is interesting to see an essentially Darwinian argument against nature red in tooth and claw within the firm.

    The most interesting application of management forced competition that I have seen is having support department, like IT, compete with outside vendors. First of all, it destroyed cooperation between inside and outside workers who were working on the same project despite attempts of the worker bees to establish an effective (quality results) work environment that unfortunately was not deemed Mr. Gradgrind efficient. Management success in efficiency left a trail of cancelled projects and organizational losses as competing manager won the ears of the each of a rapidly changing cast of managers reorganized on an annual or even quarterly basis. (Staying agile was the rationale).

    That firm lost $4 billion in the first year of the collapse of the IT bubble and died in 2013 after shedding 95,000 or so employees.

    But all down the line even extending into the worker bees, the ideology was of pure competition and cut-throat competition only tempered by work groups cooperating in environments where the boss was located well away from the work group or there was a layer of management that deliberately introduced a degree of cooperation.

    Management practice is what needs mending. Economic theory is only a crutch to bad practice and a rhetorical tool for halting positive change.

  12. Afrikaan

    I start to feel very uncomfortable when people talk about competition and evolution as if the two go hand-in-hand. The idea of “survival of the fittest” does not in any way imply only competition. Competition is one way of surviving, but there are many, many others.

    I think the dominance of competition thinking in using evolution to describe business is a holdover from Victorian values, which seemed to use evolution as an excuse to justify winning at any cost by declaring it part of the ‘natural order.’

  13. Self Affine

    One last thing about this article. Appeals to evolution as a market place mechanism always leave me a bit queasy since it highlights the authors misunderstanding of evolution and biology in general.

    There is no such thing as the evolution of a corporation since these are the result of human decisions within a specific historical context and social structures. Furthermore, these are intra species events and evolution only deals with whole organisms (not specifically with traits) and their complex interaction both in building their own ecological niches, and developmental noise, mutation,differential internal development processes, contingency, etc.

    In other words, evolution is not a concept that can be readily applied to economics embedded in human society. To me this smells strongly of yet another attempt to add another “sociobiological” interpretation/dimension to explain current events.

    I would suggest:

    “The fault, dear Brutus, is not in our stars / But in ourselves …”

    All these attempts to cast our current predicament in some sort of natural paradigm should be viewed with extreme suspicion.

  14. vomkammer

    Interesting article. There is however a counter-example. The world is full of successful companies that encourage internal competition.

    I think that one aspect is missing in the model. The worker’s benefit does not necessary equals the company benefit. For instance, workers can cooperate by helping each other to get the work done efficiently. Or they can cooperate by putting less effort and demanding higher salaries (something more unlikely between hens).

    The same applies inter-company. Companies can cooperate to set standards, co-develop technology and set joint-ventures, but they can also form cartels.

    Although positive cooperation is the best (for both group members and their “client”), the effects of negative cooperation can be very harmful. That is why it is reasonable for the “client” to enforce competition between group members (e.g. anti-cartel regulation), accepting some inefficiency as the price to limit negative cooperation.

    This also highlights the benefits of cooperation at a higher level, i.e. between group members and their “client”. E.g. German “Betriebsrat”:
    In English

  15. bruce wilder

    I like where this analysis is going, but I have a couple meta comments or criticisms. Not meant to be negative at all.

    1. I think it would be best to lose “market competition” as a stock phrase. “Market competition” is a key concept for the Big Lie that is neoclassical economics. There are very few actual markets in our economy, which is organized around hierarchy. We have a money economy to be sure, but little is actually organized by traders meeting as anonymous equals and bidding price. We have hierarchies administering price and controlling production and distribution processes and the survival of such hierarchies depends on their strategic ability to find a ” business model” that allows them, within the property rights regime (which is open to strategic change), to secure a source of economic rents. Economic rent is survival for an organization trying to control a revenue generating production or distribution process.

    2. A deepening division of labor entails an increased mutual dependency that increases the hazard of strategic non-cooperation. Control’s economic function, if you like, is economizing on waste and error. Not to be confused with the allocative efficiency of “markets”; this is technical efficiency. It is accomplished by contracts, standards and above all, by management supervision.

    The economics of management supervision, despite a huge principal-agent lit, are not part of our common intuitions. It is not a horizontal discrete market exchange of mutual bidding, but rather a vertical continuing relationship with authority and power.

  16. Wisdom Seeker

    This article is total crap. The very first sentence is a proof-by-assertion claim (i.e., logical fallacy), which is never supported anywhere else in the article, not even with a citation or reference to related work.

    “One of the best models of competitive markets in an economy is an evolutionary one that embeds the ideas that cooperation and competition operating at different levels.”

    Only a few lines down there is another whopper:
    “A firm (or any organisation) can be considered a reproducible unit.”

    Human organizations are not reproducible units, as anyone who has tried to do this will attest.

    Biological evolution works because parents pass hereditary traits to their children via DNA (and to a lesser extent through culture / nurture patterns). Corporations and organizations don’t have children, and in general attempts to duplicate organizations fail to “reproduce” the original. Pepsi is not Coke, no other search engine is Google, and so on.

    More deeply, biological evolution is possible because there are enough ecological niches for many creatures of each species to coexist. It’s possible to have large populations with genetic diversity. But corporate ecology doesn’t work that way; Coke and Pepsi, Google, Facebook etc. don’t want to be reproduced, they want to kill anything that would cut in on their business. In any business niche that has been monopolized, there’s no “diversity of DNA” left to seed a new generation of “better-evolved” organization.

    What really happens in business is not evolution, but more like a monocultured farm or the Irish Potato Famine: when the soil becomes infertile or the pests arrive, the crops fail altogether. The farmers hold out as long as they can, but eventually give up, and then after a lot of pain and suffering someone tries something new.

    Yves’ article about the late-stage behavior of the Long Term Care “Insurance” industry, with Genworth as the largest player, is a good example of how evolution does NOT take place in market competition.

  17. RBHoughton

    Here in HK we don’t do competition, its anti-social. We use administrative controls to restrict our markets – your nearest civil servant will set it up for you. That limits the market to nice people, no psychopaths.

    In consumer retail the HK system is called ‘market-adapted pricing.’ The chap with the biggest market share sets the prices and the rest discount a bit off that. Its pleasant and elegant, buyers don’t seem to mind or care and we all make a ton of money, so that’s nice. We have just increased selling prices hugely due to global inflation but hardly a whimper was heard from the consumers. We do compete though advertising but we don’t spend much on it as the creative people have inappropriate ideas about their value.

    There is one exception to the M-A Pricing rule. The cell-phone market was set up when UK was about to relinquish sovereignty and belatedly concerned for its reputation. Then the Last Governor required strong competition built in to the law and it was.

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