Over at Cap’n Arbyte’s blog, Kyle Markley sets up an interesting, (but flawed) thought experiment regarding “unfair” competitive practices. I have some problems with his assumptions, which I might post later, but for the time being, I’ll answer his questions. The assumptions regarding the competitive environment and the consumers’ behavior, are, in my opinion, bad assumptions.

Anyways, this is his game, which he summarized in a follow-up blog post:

Recall that you run a gasoline station with a small convenience store, and your competitor is a grocery store that also sells gasoline. Here’s a quick list of the scenarios; refer to the earlier article for their full exposition:

1. Competitor offers greater grocery selection.
2. Competitor offers greater grocery selection and lower grocery prices.
3. Competitor offers greater grocery selection and lower grocery prices and break-even gasoline prices.
4. Competitor offers greater grocery selection and lower grocery prices and sells gasoline at a loss.
5. Competitor is financed by an eccentric billionaire and sells all its products at a loss.
6. Competitor is subsidized by a foreign government and sells all its products at a loss.

But Kyle’s query is really one about fairness & equity. I don’t think any of the examples he sets forth are “unfair.” But then, I’m a free-market advocate. I wouldn’t think those things are unfair. Do I understand why some people might think they’re unfair? Well, yeah, I guess. But they’re wrong.

The capitalist entrepreneur always, always bears the risk of loss. This is a part of doing business – odds are, he will not succeed in his endeavor. There were other opportunities – less risky, less profitable, or perhaps both – in which his money could’ve been invested. He chose gasoline. After having been ousted from the gasoline retail market, he can try as he might to salvage his capital and employ it in one of these other manners, which he previously felt unworthy, and now, become possibly valuable to him.

Entrepreneurial profits are the result of the errors of others – the profit-maker earns a profit because he is able to combine scarce economic resources better, cheaper, or more efficiently than his competitors. This only means that the competitors didn’t realize the opportunity for profit. They inevitably lose. Entrepreneurial losses are a result of one’s own entrepreneurial error. So what has happened here, is that the service station owners erred in their judgement of the market. They could’ve opened a grocery store. But they didn’t.

On the question of intervention, Kyle asks “what form would it take?” This is wholly irrelevant. The results differ only in degree. What we can say with certainty, is that the beneficiaries of the intervention will be sustained at least in the short run by the loss to the consumers, made necessary by the prices which are higher than they would otherwise pay. If your gas station receives a subsidy from government intervention, and your competitor across the street does not, it ought to be clear that his business will suffer that much more. Which businesses receive these benefits is usually decided in an arbitrary, and consequently, a patently unfair manner. Regardless, in all instances of intervention, the consumers are by far the worse off. They have less real, disposable income than they otherwise would, as a result of legislative fiat. They are prohibited from spending their money, that they earned, on things that they want, and at prices which vendors are willing to accept.

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The question ought to be asked: To whom is the practice unfair? If this sort of practice is unfair to anyone, it’s the foreign taxpayers who are subsidizing our gasoline usage.

Taken to the extreme of subsidization: What if the foreign government gave a 100% subsidy to the product, gasoline. In essence, foreign gasoline is given away, for free, in the US Market, by one particular company. All of the other companies go out of business, or suspend operations (more likely scenario) in the short- to medium-run. This is not politically palatable, especially in the long run…The foreign taxpayers are left footing the entire bill for US gasoline purchases. Demand goes through the roof because price = 0, and the subsidized company, faced with mounting losses, is forced back into market competition.