Competing through innovation
Airplanes and airlines
The relationship of competition and innovation was determined to be ambiguous. Too little, and the leader has no incentive to innovate. Too much, and no one bothers because their advantage will get competed away. It is hard to measure innovation, per se, but we can look at some examples of different industries that have very different organizations but in which some competition seems to spur innovation.
Let’s start with airlines. Boeing and Airbus produce something north of 95% of all large airliners used in the world today. They are a classic oligopoly, and to this point there is no collusion, in part because they have become proxies for America and Europe and how successful their economies are.
They compete. Hard.
Over the course of decades they have introduced new features to capture sales from the other, and in a relatively short period of time those innovations find their way into the other type of airplane. This back and forth between Boeing and Airbus exemplifies the idea of innovation producing real gains for people (lower fuel usage, higher quality air) generated by competition between firms.
Great, so in this case we’ve got an industry that is pretty concentrated, yet delivers innovation. What about the other side of the air travel market, the airlines themselves? Here we can find examples of things that may be more at the “tails” of the competition spectrum.
Consider first the major US airlines, of which there are now only four. If you have some intuition that they are not competitive, it isn’t hard to find evidence for it. Most settled with the federal government recently over collusion regarding routes. In short, they split up routes among one another and agreed to not compete, allowing the holder of the route to charge a huge markup.
Note that this involves more firms that are involved in producing aircraft. So the mere fact that there are fewer firms does not necessarily imply less competition. That aside, what did the monopolization of routes mean for innovation in air travel? You could argue that innovation went backwards to some extent, at least from the perspective of consumer comfort. This video (with some groovy instrumentals to put you to sleep) illustrates the shrinking size of seats over the years.
Among the major airlines you’ve got limited competition and arguably little in the way of innovation. What about at the other end of the airfare spectrum, among budget airlines? They could be seen as constituting and entirely different industry, given that they operate almost exclusively from a different set of airports and very consciously try not to compete with major airlines.
These airlines are very competitive with one another. Whether they are innovative depends on your point of view. They have the same seat limits that major airlines do, and at times have reduced seats to even smaller sizes. The difference from a consumer standpoint, at least, is that the savings from these measures are generally passed along to consumers in the form of very low prices. But that just confirms something we would have suspected about markets to begin with. In competitive markets, consumers reap a big consumer surplus. In a monopolistic market (like the major airlines) the producers keep prices high and are able to capture much of that consumer surplus. That’s just a question of distribution, though.
From the perspective of innovation, on the other hand, both majors and budget airlines appear to be lacking. For majors, that is because they have no need to innovate to gain market share as they collude. For budget airlines, there is little innovation because any advantage they gain from an innovation will quickly be copied and competed away by other budget airlines. One could conceivably contrast this with the major airframe makers - Boeing and Airbus - which appear to have a “healthy” amount of competition with one another and use it to generate innovations on a regular basis.
Finding the sweet spot
Some competition appears to be good for innovation. If you look around you can find examples of competition inducing follow-on innovations. Start with the Nike Vaporfly shoe. This is the one that Eliud Kipchoge used to break the 2-hour barrier in a marathon late last year. Let’s just pause and appreciate how ridiculous that is, for a moment. He ran 26 (and 2/10s) miles, in a row, all at roughly a 4:30 pace. 4:30, by the way, is like setting your treadmill on 13 at the gym.
Anyway, he did this wearing Vaporfly shoes, and many people feel that these contain the innovations that allowed him to accomplish this feat. More important, they - other shoemakers, really - felt that the Vaporfly was unfair because it gave Nike athletes an unfair advantage of their athletes at competitions. In particular, the now-canceled 2020 games were coming up and other shoe companies didn’t want Nike to sweep the distance events. So what happened?
In a relatively short time frame everyone brought out some version of a Vaporfly shoe. This is the impact of competition on innovation that we’re talking about. Yes, Nike has intellectual property rights protections on specifics of the Vaporfly, but that doesn’t stop other companies from coming up with different ways of achieving similar results. If we want to work backwards in this case, we could infer that the running shoe market has enough competition to induce a lot of innovation, but not so much that firms give up on innovating. Although Nike would probably argue that the quick replication of their shoe does give them pause about inventing the next cool shoe.
One-hundred and eighty degrees removed from this on the health scale are fried chicken sandwiches. Popeye’s released their now-famous chicken sandwich in August 2019 (about one year ago on the calendar as I write this, and about 10,000 subjective years ago). That quickly led to what has been termed the fried chicken sandwich wars. It did not take long for KFC, Chick-fil-A, and Zaxby’s (which I guess is a thing) to get in on the act.
Is this another example of a good amount of competition? Again, it is hard to strictly measure innovation, but it seems similar to the Nike situation. Big buzz around the new product, but then competitors swarm in to match it with their own. In both Nike’s and Popeye’s case, their industries may be closer to the competitive ideal because the products still retain a unique flavor (pun intended). Sure, adidas or Saucony can introduce a super-cushioned shoe with a carbon-fiber plate in it, but a lot of people are not going to defect from the Vaporfly to some wanna-be Nike shoe. There is branding involved as well as our tendency to get attached to certain products. Same with sandwiches. Popeye’s was first, and the KFC sandwich is a clear rip-off of the concept. So while there is competition, perhaps the advantages of the innovators remain strong enough that we’ll continue to get new innovations.
What about a market where the product is in no way unique across firms or locations: gas. The stuff you put in the tank of your car is basically the same no matter where you go. Yes, there are things like “Chevron with Techron” that are in principle different than standard gas, but the differences tend to be small. There is little space to innovate on providing gas because it is hard to distinguish your product from anyone else. This is not a Popeye’s versus KFC situation.
We’d expect, then, to see little innovation among the hyper-competitive world of gas stations. And short of adding credit card machines, you might be hard pressed to think of something truly new about a gas station in the last couple of decades. They operate basically the same as they did a couple decades ago.
That doesn’t mean people won’t try to innovate on some other dimension. Think Buc-ees.
It’s a gas station, fundamentally. But Buc-ees has managed to separate themselves from other gas stations through innovation. That innovation, however, was really to change the firms they were competing with. By adding the snacks, fresh food, and merchandise, Buc-ees took themselves out of competing on gas with Shell stations, and moved themselves into a market where they are really competing with grocery stores and restaurants. In those markets a firm can distinguish itself from others along the lines of Popeye’s or Nike - by creating a distinct brand - and presumably generate some economic profits that support innovation. You get to enjoy Beaver Nuggets because Buc-ees faces just enough competition to feel some heat, but not so much that it isn’t worth it.