Introducing competition
During the wave of privatizations that happened during the Thatcher and Major years, great stress was made upon transferring the ownership of industries and utilities from the public to the private sector. But in fact it is competition, rather than private or state ownership, that is the real driver of innovation, efficiency, and consumer responsiveness. Ownership type matters, but mostly to the extent that it shapes incentives and exposure to competitive pressure.
Competition among private firms tends to be strong, so these firms usually innovate more than their public sector counterparts. State-owned enterprises (SOEs) can innovate and be efficient if they face competitive markets and strong performance incentives. Monopolies, whether private or state, tend to innovate and respond less unless forced by regulation or potential competition.
In the division between ownership and competition, economic research generally shows that competition is the key mechanism. Competition forces any organization to cut costs, leading to greater efficiency, to improve offerings, leading to more innovation, and to respond to consumer demands, because failing to do so means losing market share or threatening survival.
Ownership shapes incentives, but is secondary, because even private ownership without competition can produce stagnation, while state-owned firms under real competition can perform surprisingly well.
Private firms face competition, with strong profit incentives leading to high pressures to innovate. Venture capital and private investment support risky R&D, and poor performance has consequences, such as losing market share or facing takeover. Typically, we find high efficiency and rapid innovation in competitive industries such as tech, manufacturing, and consumer goods.
State-owned enterprises can perform well when they compete directly with private firms, when their managers face clear performance metrics, and when political interference is minimized.
Without competition, private monopolies maximize profits at consumers’ expense, and state monopolies may become inefficient and unresponsive. Both innovate less.
Too little competition leads to monopolistic complacency. And more competition brings the strongest innovation incentives. But there are exceptions where ownership dominates competition. Platforms such as Meta or Google can dominate even in competitive markets.
The primary driver of innovation, efficiency, and consumer responsiveness is competition in product, labour, and capital markets. The secondary modifiers are type of ownership, incentive structures, access to capital, and culture and organizational strategy
Competition aligns incentives with consumer welfare, but ownership shapes how strongly that alignment operates. It is competition, not private ownership alone, that is the fundamental force pushing firms to innovate, become efficient, and respond to consumers.
Private ownership works best when competition is strong. What matters most is not who owns the firm, but whether the firm must compete. This should be borne in mind when facing public institutions. The surest way to improve them is to expose them to competition. The salient question is not whether to do this, but how to do it.
Madsen Pirie