Editor's letter

Why competition makes everyone better off

Almost all companies think they’d be better off without competition. They might be right in the short term, says Merryn Somerset Webb. But they are wrong in the long term.

St Andrews University students in their red gowns © Stephen Dorey /Alamy Live News
St Andrews has been embroiled in a row over student gowns

I went to watch one of the graduation ceremonies in St Andrews earlier this week. It's a superb university. The traditions were fabulous: every student becomes a graduate at the moment of being tapped on the head with a cap that might or might not be made from the seat of John Knox's breeches. The academics were charming. There was however, as is always the way in a scene of British perfection, a tiny underlying tension: gowngate.

Like most universities, St Andrews has an official supplier of its gowns. Like many others it has been challenged by an upstart selling cheaper ones. St Andrews reckons Churchill Gowns, an Australian website, is guilty of pretending theirs are both endorsed by the university and of similar quality as the official ones when they are not. Churchill says the university is behaving anti-competitively.

You get the idea. They may well both be right. You can buy a gown from anyone. No rules against it. You don't even actually have to have a gown. But who is going to graduate without a gown? And if the university elite has endorsed one gown, who wants to feel that theirs isn't somehow the best? And so are the kind of moats that hold back competitors dug.

This brings us to Facebook. It has a fantastic oligopolistic position in the world of social media and it is revving up to carve one out in money too (see my article on moneyweek.com). It's clearly keen to protect that position. Witness the firm's newly minted PR man, Nick Clegg, and his call for more social-media regulation. As The Times points out, when a company such as Facebook calls to be regulated, "the rest of us are entitled to count our spoons".

Rules offer an opportunity to entrench the status quo, to make controversial business models look just fine and to raise barriers to entry, "saddling challengers with onerous compliance costs." Something which would suit Facebook down to the ground. Almost all companies reckon they'd be better off without competition. They might be right in the short term. But given that competition is the greatest driver of efficiency and innovation there is they are wrong in the long term. That makes us all worse off.

Finally, to the most frustrating of this month's moats: the one around Neil Woodford's gated equity income fund. The longer this saga goes on the more its effects ripple through the industry. I've written about this on the blog. But here's a brief list of all those suffering alongside the fund's investors: the investors in Patient Capital Trust: the investors in funds that have equity cross holdings with Woodford; the managers of small-cap funds having to reassure nervy investors that their liquidity risk management is just fine; Hargreaves Lansdown and wannabe Bank of England governor Andrew Bailey whose chances might be hit by the questions being asked of the Financial Conduct Authority (of which he is head).

Anyone would think the fund management industry represented a threat to the global financial system. Is Woodford a small canary in a big coal mine? We will see. In the meantime if you want to be sure you will never be gated, David Stevenson suggests some out-of-favour investment trusts this week, that should suit very well indeed, and Alex Rankine explains why gold is the answer to almost every question.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Quiz of the week, 17–23 October
Economy

Quiz of the week, 17–23 October

Test your recollection of the events of the week with MoneyWeek's quiz of the week.
23 Oct 2020
In UK stocks, the market has chucked us a bone – we should grab it
Economy

In UK stocks, the market has chucked us a bone – we should grab it

UK stocks are trading at their biggest discount to global equities in 40 years. You should probably be looking to buy, says Merryn Somerset Webb.
22 Oct 2020
22 October 1962: Start of the Cuban missile crisis
This day in history

22 October 1962: Start of the Cuban missile crisis

On this day in 1962, the Kennedy administration issued its famous ultimatum – either the USSR removes its nuclear weapons from Cuba, or else.
22 Oct 2020

Most Popular

Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020