A Quick Question for Those Who Consider Competition to be Sometimes Tortious

by Don Boudreaux on May 1, 2014

in Economics, Myths and Fallacies, Seen and Unseen

Wonky

Company A and Company B are rivals in the same industry.  Company A makes a new investment to gain a small but privately lucrative advantage over Company B at attracting consumers.  Company A’s investment is successful (at least from the perspective of Company A – and from that of consumers of this industry’s output).  Company B goes bankrupt.

Decision-makers for Company A did not, of course, reckon as part of the cost of their new investment the lost value of Company B’s investment.  If I understand Steve Landsburg’s argument, sometimes investors’ or entrepreneurs’ failure to account for the lost value of a rival’s (or of rivals’) investments creates social waste.  This waste is the destruction of the value of rivals’ productive capital assets when the additional net social value of the new investment is less than the amount of social value of the ‘older’ assets that is destroyed by the new investment.

I believe that Steve is mistaken.  I promise to write more in-depth on this matter when my current flurry of busy-ness subsides, but I want here, before I forget it, to ask a question that just occurred to me about this matter.  The question is this: If Steve is correct that Company A’s investment – by destroying the value of rival Company B’s investment – can generate some loss that is legitimately described as a net social waste, is the same outcome possible if consumers change their spending patterns?

That is, suppose (say) that in 2014 several farmers, food-processing firms, supermarkets, and restaurants – responding attentively to current consumer tastes and demands – make costly investments in supplying consumers with more food options that conform to the Atkin’s diet.  At first these investments prove worthwhile.  But in 2015 consumers change their tastes completely: they come overwhelmingly to prefer (and, hence, to purchase) more donuts, bread, pasta, beer, and other high-carbohydrate foods.  And in doing so consumers naturally reduce their purchases of meats and other foods recommend by the Atkin’s diet.  When consumers changed their preferences and their patterns of demand, each selfishly thought only of himself or herself.  Each consumer sought only to maximize his or her personal utility and gave not a whiff of a thought to the effect that his or her changed preferences (and correspondingly changed patterns of demand) has on the value of food-suppliers’ invested capital.  That is, although consumers’ changed demands caused capital losses on others, consumers ignored those losses when making their new spending plans.

Is such a change by consumers of their voluntarily expressed patterns of demand a source of social waste?  Does the answer depend upon the value of the capital ‘destroyed’ relative to the ‘value’ of the extra utility consumers collectively receive by switching from their older patterns of demand to their now newer, and now-more-preferred patterns of demand?

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