The orthodox theory of competition assumes that each trader in a given field will attempt to excel the others in the satisfactions offered, thus attracting more custom and making greater profits. The customers also benefit, receiving greater satisfactions.
It is a troublesome, risky and expensive model for traders to follow, and being sensible people they look for ways to avoid it. Sometimes they enter into agreements among themselves. As Adam Smith put it, the members of a trade never gather together, even for conviviality, without the meeting resulting in some arrangement disadvantageous to the public. Another, less formal method, is for each of them to be careful not to depart far from a generally-accepted standard. This is done, for example, by the clearing banks.
Customers dissatisfied with one move to another, but since all are being careful to offer virtually the same satisfactions these movements tend to cancel out; as A moves from Natwest to Barclays, B moves from Barclays to Midland, C from Midland to Lloyds and D from Lloyds to Natwest.
There are limits to the benefits to be won in this way, since if the rate of profit made rises far above that of other trades new entrants will be attracted who undercut the established traders. But the two methods mentioned do have the effect of virtually suppressing competition within a trade, enabling the traders to live more comfortably and securely and depriving the customers of part of the benefit competition is intended to secure for them.
If traders are to engage in the risky business of trying to gain advantage by offering the public greater satisfaction than is being offered by others in the trade then cosy arrangements, and working to a tacitly agreed common standard must both be inhibited. This can only be achieved by a power stronger than any combination of traders. In this connection also, freedom – here free competition – can survive only if united with restraint.
from Ideological Commentary 31, January 1988.