What are five instances when market competition does not work to lower prices?

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The effectiveness of market competition, as understood according to classical liberal economics, is always dependent on the circumstances in which a given business has to operate. The purely liberal economy as envisaged by Adam Smith and David Ricardo is a competitive market that encourages competition. When Smith argued that every man uses his capital in every way possible in order to promote his own personal welfare, he suggested that this would allow an expansion of the market, a furthering of the division of labor, and an increase in the number and variety of products available to consumers. Social equality would come about when a sort of equilibrium was reached between all of these different market forces.

When businesses compete in a way that directly undermines this kind of market equilibrium, we can say that competition will not work to lower prices. A good example of this is the Coca-Cola company. When Coca-Cola developed its operations in India throughout the 1900s, it had already accumulated a level of international capital, investment, and infrastructure necessary to become an instant hit in the country. What did this mean for local producers, though? For Indian manufacturers of the country’s most popular soft drink, “Parle,” this meant either that they had to be willing to sell their bottling factories to the Coca-Cola company or be driven out of business by an international super-business that they had no hope of competing with. And they did just that. By the 1990’s, the only major soft-drink available for purchase in Indian marketplaces (primarily) was Coca-Cola; the company had all but destroyed locally-produced and diverse soft-drink products.

Strictly speaking, the Coca-Cola company was engaging in a form of legitimate market competition. But the end result was not the reduction of prices (to avoid losing revenue, manufacturers of Parle actually had to increase the price per bottle), but the normalization of a price that was determined by the international market. But on a more nuanced level, Coca-Cola was destroying the very elements of a rational liberal economy that earlier thinkers, like Smith and Ricardo, had expounded. Coca-Cola, at least in the example of India I have provided, reduced competition by making sure that the only viable soft-drink option was Coke, limited diversity by chasing away all of its competitors, and reduced any division of labor by simplifying its production practices and normalizing standards across all of its production facilities. In this kind of economy, prices were not lowered according to an increase in market equilibrium, but rather stagnated, while all other options were eradicated.

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