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[Review] Out-Executing The Competition

One avoids the problem of behavioral exploitation and perhaps the competitive escalation paradigm. Competition benefits society when individual and group interests and incentives are aligned or at least do not conflict. Difficulties arise when individual interests and group interests diverge. One area of suboptimal competition is where advantages and disadvantages are relative. Hockey players are another example. Hockey players prefer wearing helmets. But to secure a relative competitive advantage, one player chooses to play without a helmet.

The other players follow. None now have a competitive advantage from playing helmetless. Collectively the hockey players are worse off. A recent example is Wall Street traders who inject testosterone to obtain a competitive advantage. They and society are collectively worse off. Below are five additional scenarios where competition for a relative advantage can leave the competitors collectively and society worse off. Today corporations and trade groups spend billions of dollars lobbying the federal and state governments.

Microsoft now spends millions of dollars annually on lobbying. The Supreme Court quickened the race to the bottom when it substantially weakened the limitations on corporate political spending, and thereby vastly increased the importance of pleasing large donors to win elections. These corporations fear that officeholders will shake them down for supportive ads, that they will have to spend increasing sums on elections in an ever-escalating arms race with their competitors, and that public trust in business will be eroded.

A system that effectively forces corporations to use their shareholders' money both to maintain access to, and to avoid retribution from, elected officials may ultimately prove more harmful than beneficial to many corporations. It can impose a kind of implicit tax. When auditor Ernst and Young recently surveyed nearly chief financial officers, its findings were disturbing: When presented with a list of possibly questionable actions that may help the business survive, 47 per cent of CFOs felt one or more could be justified in an economic downturn. Worryingly, 15 per cent of CFOs surveyed would be willing to make cash payments to win or retain business and 4 per cent view misstating a company's financial performance as justifiable to help a business survive.

While 46 per cent of total respondents agree that company management is likely to cut corners to meet targets, CFOs have an even more pessimistic view 52 per cent. Competition, economist Andrei Shleifer discusses, can pressure companies to engage in unethical or criminal behavior, if doing so yields the firm a relative competitive advantage. Other firms, given the cost disadvantage, face competitive pressure to follow; such competition collectively leaves the firms and society worse off. But under a shared value worldview, these concepts are reinforcing. The conflict between collective and individual interests arose in the financial crisis.

Banks, the OECD described, are prone to take substantial risks: First, the opacity and the long maturity of banks' assets make it easier to cover any misallocation of resources, at least in the short run. Second, the wide dispersion of bank debt among small, uninformed and often fully insured investors prevents any effective discipline on banks from the side of depositors. Thus, because banks can behave less prudently without being easily detected or being forced to pay additional funding costs, they have stronger incentives to take risk than firms in other industries.

Examples of fraud and excessive risk are numerous in the history of financial systems as the current crisis has also shown.

Banking Industry Outlook | Deloitte US

Even for rational-choice theorists like Richard Posner, the government must be a countervailing force to such self-interested rational private behavior by better regulating financial institutions. One may ask if competition is the problem, then is monopoly the cure. The remedy is neither monopoly nor overregulation which besides impeding competition, stifles innovation and renders the financial system inefficient or unprofitable. The FTC in Ethyl described this divergence: An individual customer may rationally wish to have advance notice of price increases, uniform delivered pricing, or most favored nation clauses available in connection with the purchase of antiknock compounds.

However, individual purchasers are often unable to perceive or to measure the overall effect of all sellers pursuing the same practices with many buyers, and do not understand or appreciate the benefit of prohibiting the practices to improve the competitive environment …. In short, marketing practices that are preferred by both sellers and buyers may still have an anticompetitive effect.

What the appellate court failed to grasp is that MFNs—while individually rational—can be collectively irrational. If the buyers fiercely compete, MFNs seemingly provide a relative cost advantage. Why should they uniquely incur the cost, when the benefits accrue to their rivals? Status competition epitomizes competition for relative position among consumers with interdependent preferences.

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Either people adapt to their fancier lifestyle, and envy those on the higher rung. Status competition not only taxes individuals but society overall. Status competition has confounded consumers and economists for centuries. John Maynard Keynes, for example, assumed that with greater productivity and higher living standards, people in developed economies would work only fifteen hours per week. Keynes correctly predicted the rise in productivity and real living standards. This analysis would reveal that the failure to live it is due to a kind of unconscious cut-throat competition in fashionable society.

Status competition is often, but not always, detrimental. On the bright side, people voluntarily compete and use Internet peer pressure to change their energy consumption, driving, and exercise habits. One interesting empirical study sought to understand why academics cheated by inflating the number of times their papers were downloaded on the Social Science Research Network SSRN.

Why the deception? Status competition, the study found, was a key contributor. In all five scenarios, competitors seek a relative advantage that ultimately leaves them collectively and society worse off. This suboptimal competition is not a new concept.


Many, however, used a pejorative term, instead of competition, to describe it, such as: a collective action problem, Firms—independent of any competitive pressure—at times impose a negative externality to maximize profits. For example, electric power utilities, whether or not a monopoly, will seek to maximize profits by polluting cheaply and having the community bear the environmental and health costs. The utility monopoly, for example, may lobby to keep abay pesky environmentalists, but it would not expend resources on lobbying to secure a relative competitive advantage when its market power is otherwise secure.

The previous subsection identifies five scenarios where competition for a relative advantage leaves the competitors and society worse off. Underlying democracies is the belief that competition fosters the marketplace of ideas: truth prevails in the widest possible dissemination of information from diverse and antagonistic sources. For if the problem were attributable primarily to misaligned incentives, then the problem would arise in duopolies, and be unaffected by entry and increased competition.

Here, misaligned incentives play an important role, but so do increased entry and competition. This subsection discusses two industries, where, as recent economic studies found, greater competition yielded more unethical conduct among intermediaries. But this problem can arise in other markets as well. Home appraisers, pressured by threats of losing business to competitors, inflate their valuations to the benefit of real estate brokers who gain higher commissions and lenders who make bigger loans and earn greater returns when selling them to investors.

Ratings agencies provide several complementary functions: i to measure the credit risk of an obligor and help to resolve the fundamental information asymmetry between issuers and investors, ii to provide a means of comparison of embedded credit risk across issuers, instruments, countries and over time; and iii to provide market participants with a common standard or language to use in referring to credit risk. One cannot fault the DOJ for assuming that entry, in increasing competition, often benefits consumers.

The increased competition resulted in significant ratings grade inflation as the agencies competed for market share. Importantly, the ratings inflation was attributable not to the valuation models used by the agencies, but rather to systematic departures from those models, as the agencies made discretionary upward adjustments in ratings in efforts to retain or capture business, a direct consequence of the issuer-pays business model and increased concentration among investment banks.

Issuers could credibly threaten to take their business elsewhere. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before. The world's two largest bond-analysis providers repeatedly eased their standards as they pursued profits from structured investment pools sold by their clients, according to company documents, e-mails and interviews with more than 50 Wall Street professionals.

Even in the staid world of corporate bonds, increased competition among the ratings agencies led to a worse outcome. One empirical economic study looked at corporate bond and issuer ratings between the mids and mids. The reputational mechanism appears to work best at modest levels of competition. In New York, like other states, automobile owners must have their vehicles periodically tested for pollution control. In this market, the government fixed the price of emission testing. So the testing centers competed along non-price dimensions such as quick testing and passing vehicles that otherwise should flunk.

Antitrust typically treats entrants as superheroes in deterring or defeating the exercise of market power. Here entrants, the study found, were likelier the villains. If customers indeed demand illicit dimensions of quality, firms may feel compelled to cross ethical and legal boundaries simply to survive, often in response to the unethical behavior of just a few of their rivals.

In markets with such potential, concentration with abnormally high prices and rents may be preferable, given the reduced prevalence of corruption. The Supreme Court recognized that competition could increase vice. This article simply examines the initial issue of whether competition in a market economy is always good. If, as this article explores, the answer is no, a separate institutional issue is whether we should allow private parties to deal with these types of failures or whether legislation is required. Once antitrust officials recognize that market competition produces at times suboptimal results, the debate shifts to whether the problem of suboptimal competition can be better resolved privately by perhaps relaxing antitrust scrutiny to private restraints or with additional governmental regulations which in turn raises issues over the form of the regulation and who should regulate.

Even if one concludes that private restraints were the solution, the economic literature has not developed sufficiently an analytical framework for courts and agencies to apply, consistent with the rule of law, a suboptimal competition defense. Nor is it necessarily superior that independent agencies or courts rather than elected officials determine which industries receive a suboptimal competition defense, when, and under what circumstances. Society may prefer that the more publicly accountable elected officials, despite the risk of rent-seeking, should decide when competition is suboptimal.

Accordingly, antitrust officials should continue to advocate competition and challenge private and public anti-competitive restraints. But competition in a market economy, while often good, is not always good. The literature should prompt officials to inquire when competition promotes behavioral exploitation, unethical behavior, and misery. Some may fear this weakens competition advocacy, as rent-seekers will use the exceptions described herein to restrict socially beneficial competition.

But to effectively advocate competition, officials must understand when more competition is the problem, not the cure. In better understanding these instances when competition does more harm than good, antitrust officials can more effectively debunk claims of suboptimal competition.

By undertaking this inquiry, antitrust officials become smarter and better advocates. I also thank the University of Tennessee College of Law for the summer research grant. In trying to drape themselves in the mantle of free competition, defendants are disingenuous. Their decision to simulate plaintiffs' trade dress yields society no benefits. Above-board competition directed at factors such as quality and price is in society's interests.

Obtaining sales by facilitating passing off is not. No group can afford to drop out of the contest for government handouts; members of a group that did would pay the same taxes but receiver fewer benefits, thus redistributing income to the remaining contestants.

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Even if everybody belonged to a special interest group, so that special interest politics did not affect the distribution of wealth, interest groups still would direct resources to socially unproductive programs. First, the confidential witness statements describe a staggering race-to-the-bottom of loan quality and underwriting standards as part of an effort to originate more loans for sale through secondary market transactions.

The witnesses catalogue an explosive increase in risky loan products, including interest-only loans, stated income loans, and adjustable-rate loans, and a serious decline in loan quality and underwriting. Enable innovation through modern financial infrastructure. Chapter 2: Enable innovation through modern financial infrastructure pdf. Support the data economy through standards and protocols.

Chapter 3: Support the data economy through standards and protocols pdf. To help finance support the major transitions, the Bank should:. Champion global standards for finance. The Bank of England oversees the stability and effectiveness of the UK financial systems. Chapter 4. Champion global standards for finance pdf. Promote the smooth transition to a low carbon economy. Chapter 5. Promote the smooth transition to a low carbon economy pdf. Adapt to the needs of a changing demographic.

Chapter 6. Adapt to the needs of a changing demographic pdf. To ensure that finance increases resilience to new risks, the Bank should:. Safeguarding the financial system from evolving risks. Chapter 7. Safeguarding the financial system from evolving risks pdf. Enhance protection against cyber risks. Chapter 8. Enhance protection against cyber risks pdf. Embrace digital regulation. Chapter 9. Embrace digital regulation pdf. Convert this page to PDF. Other publications. Back to top. Page Url. Is Mobile. IP Address. Then do it again. This cycle should be the number one focus of the company, and it should drive everything else.

The faster the repeat rate of this cycle, the better the company usually turns out. During YC, we tell founders they should be building product and talking to users, and not much else besides eating, sleeping, exercising, and spending time with their loved ones. To do this cycle right, you have to get very close to your users. Literally watch them use your product. Sit in their office if you can. Value both what they tell you and what they actually do. You should not put anyone between the founders and the users for as long as possible—that means the founders need to do sales, customer support, etc.

Understand your users as well as you possibly can. Really figure out what they need, where to find them, and what makes them tick. You usually need to recruit initial users one at a time Ben Silbermann used to approach strangers in coffee shops in Palo Alto and ask them to try Pinterest and then build things they ask for. Many founders hate this part, and just want to announce their product in the press.

But that almost never works. Recruit users manually, and make the product so good the users you recruit tell their friends. You also need to break things into very small pieces, and iterate and adapt as you go. In fact, simplicity is always good, and you should always keep your product and company as simple as possible.

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Some common questions we ask startups having problems: Are users using your product more than once? Are your users fanatical about your product? Would your users be truly bummed if your company went away? Are your users recommending you to other people without you asking them to do it? The best founders seem to care a little bit too much about product quality, even for seemingly unimportant details. But it seems to work. You need to offer great support, great sales interactions, etc. You cannot outsource the work to someone else for a long time.

This sounds obvious, but you have to make money. The only universal job description of a CEO is to make sure the company wins. You can do this as the founder even if you have a lot of flaws that would normally disqualify you as a CEO as long as you hire people that complement your own skills and let them do their jobs.

Growth and momentum are the keys to great execution. Founders and employees that are burn out nearly always work at startups without momentum. The most important way is to make it your top priority. The company does what the CEO measures. If you care about growth, and you set the execution bar, the rest of the company will focus on it.

The founders of Airbnb drew a forward-looking graph of the growth they wanted to hit. They posted this everywhere—on their fridge, above their desks, on their bathroom mirror. If they hit the number that week, great. If not, it was all they talked about. Mark Zuckerberg once said that one of the most important innovations at Facebook was their establishment of a growth group when growth slowed.

This group was and perhaps still is one of the most prestigious groups in the company—everyone knew how important it was. Talk as a company about how you could grow faster. Extreme internal transparency around metrics and financials is a good thing to do. For some reason, founders are always really scared of this. The common mistake here is to focus on signups and ignore retention. But retention is as important to growth as new user acquisition. You should set aggressive but borderline achievable goals and review progress every month. Celebrate wins!

There are a few traps that founders often fall into. One is that if the company is growing like crazy but everything seems incredibly broken and inefficient, everyone worries that things are going to come unraveled. In practice, this seems to happen rarely Friendster is the most recent example of a startup dying because of technical debt that I can point to. My favorite investments are in companies that are growing really fast but incredibly un-optimized—they are deeply undervalued.

Out-Executing the Competition Building and Growing a Financial Services Company in Any Economy

A related trap is thinking about problems too far in the future—i. A good rule of thumb is to only think about how things will work at 10x your current scale. By the way, this is a really important example—have great customer support. Humans are very bad at intuition around exponential growth. Remind your team of this, and that all giant companies started growing from small numbers. Some of the biggest traps are the things that founders believe will deliver growth but in practice almost never work and suck up a huge amount of time.

Beware of these and understand that they effectively never work. Instead get growth the same way all great companies have—by building a product users love, recruiting users manually first, and then testing lots of growth strategies ads, referral programs, sales and marketing, etc. Ask your customers where you can find more people like them. Remember that sales and marketing are not bad words. At least one founder has to get good at asking people to use your product and give you money.

For B2B products, I think the right answer is almost always to track revenue growth per month, and remember that the longer sales cycle means the first couple of months are going to look ugly though sometimes selling to startups as initial customers can solve this problem.

These words seem to really apply to the best founders I know. They are relentlessly focused on their product and growth. No great company I know of started doing multiple things at once—they start with a lot of conviction about one thing, and see it all the way through. You can do far fewer things than you think. A very, very common cause of startup death is doing too many of the wrong things. Prioritization is critical and hard. They get things done very quickly.

Why Profits Rose

Great founders listen to all of the advice and then quickly make their own decisions. You have to pick the right things. You are not different from other startups. You still have to stay focused and move fast. Companies building rockets and nuclear reactors still manage to do this.

When you find something that works, keep going. The extreme cases—early-stage founders with their own publicists—that one would think only exist in TV shows actually exist in real life, and they almost always fail. Focus and intensity will win out in the long run. Earlier I mentioned that the only universal job description of the CEO is to make sure the company wins. A CEO has to 1 set the vision and strategy for the company, 2 evangelize the company to everyone, 3 hire and manage the team, especially in areas where you yourself have gaps 4 raise money, and 5 set the execution quality bar.

In addition to these, find whatever parts of the business you love the most, and stay engaged there.

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If you are successful, it will take over your life to a degree you cannot imagine—the company will be on your mind all the time. You can have one other big thing—your family, doing lots of triathlons, whatever—but probably not much more than that. You have to always be on, and there are a lot of decisions only you can make, no matter how good you get at delegation. You should aim to be super responsive to your team and the outside world, always be clear on the strategy and priorities, show up to everything important, and execute quickly especially when it comes to making decisions others are blocked on.

If the team sees you doing these things, they will do them too. Managing your own psychology is both really hard and really important. Being a CEO is lonely. A successful startup takes a very long time—certainly much longer than most founders think at the outset. You cannot treat it as an all-nighter. You have to eat well, sleep well, and exercise. You have to spend time with your family and friends.