Vosper: Perfect Competition Part 1: Why Does The Bike Industry Have It & What’s So Perfect About It

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I first discovered the concept of perfect competition in cycling thanks to my friend Chris Allen. He is a longtime industry man, currently retired, with credentials such as Suntour, West Coast Cycles, Raleigh, Haro, GT, Shimano, Crank Brothers, Intense and others.

“It was in 2001, after the Schwinn / GT debacle, and I decided to get a master’s degree in business,” he recalls, “mainly to try to understand what was going on in the bicycle industry. So I enrolled in the intensive MBA program at San Diego State University. Among the courses I took was management economics from Dr Maurice Rahimi.

One of the things discussed in the program was the notion of perfect competition: a type of market in which many companies sell the same or nearly identical products or services and where none of them has enough market power to set higher prices on their products or services without losing customers. Seems familiar?

Dr. Rahimi used hi-fi components and computers as examples of perfect competition. “But I was really struck by how much that applied to the cycling industry,” Allen recalls. “There are seven or eight criteria that describe perfect competition, and each of them applies to the bicycle industry.”

“The first thing that struck me was that the products were identical; everyone was shopping at the same factories in Asia, ”says Allen. “One factory would serve as the source for three or four major brands and the differences were minimal until you got into the high end where engineering became the differential.”

The market was also transparent – the prices were known, and both resellers and consumers knew what they could pay for a given product. “Salespeople had to turn around to justify that a dealership was paying an extra dollar for their bike over a competitor’s.

“Brands lived in fear of being underestimated by their competitors. Market share wasn’t a factor, as it didn’t affect what you could charge for your product. Large companies could leverage their market share to lock in dealers (thereby excluding competitors), but they couldn’t get a (significant) price premium, Allen says.

Allen’s observations turned out to be premonitory, as the bicycle industry today is taught literally as a classic example of perfect competition at a number of colleges and universities, according to industry maven Jay Townley.

What’s so perfect about that, anyway?

Let’s take a look at definitions of perfect competition and how the bicycle industry does business.

At the Taipei Bike Show, we’re placing our orders for the year, and there’s a guy standing behind us at the booth who puts down a Gold Card and says, “I’ll get what he’s got. —Ignore Hess

1: A large number of buyers and sellers. Of course, “large” is a relative term. But according to Georger Data Services, there are currently over a hundred brands of bikes for sale in the U.S. market, and that doesn’t include those that sell only to consumers. That’s a lot of brands for a relatively small market. Now compare with the number of airlines, cell phones or car manufacturers. Much larger markets, but a lot less brands.

In terms of buyers, imports of bicycles to the United States have remained remarkably constant since 2000, despite current supply shortages linked to Covid. And, thanks to ten years of product discounts throughout the season, each of these bikes has found a buyer.

2: Low barriers to entry and exit. It is relatively easy for a business to enter or exit the bicycle industry. To get in, all it takes is a pulse and a checkbook … and if you meet the latter requirement, a number of factories or suppliers are willing to look away from the former. And, aside from offloading inventory, the cost of exit is even lower.

As industry legend Skip Hess told me when he was president of Electra bikes, low barriers to entry mean “My product managers and I break our asses all year round. designing the best bikes possible, and at the Taipei Bike Show, we’re placing our orders for the year, and there’s a guy behind us at the booth who puts down a Gold Card and says, “I’ll get what he wants.” To.

As Chris Allen pointed out earlier, that’s a little less true with high-end carbon frames and bikes, but it’s absolutely true for most of the bike industry. If you and I want to start a bicycle business, we can be up and running in less than a year. And it takes even less if we want to open a bicycle shop. I spoke about this in the context of Walmart’s Viathon brand a few years ago.

3: Mobility of the perfect factor. In the long run, the factors of production – labor, capital or available factories – allow free long-run adjustments to changing market conditions. In other words, it’s relatively easy to move production from Japan to Taiwan to China to Vietnam. And due to the low barriers to entry, that means almost anyone can play.

4: Zero transaction fees (also called perfect mobility). A subset of factor mobility. Buyers and sellers incur no or minimal costs to change factory, supplier or retailer.

5: Perfect information. The prices and quality of the products are known to consumers, retailers, suppliers and factories. Thanks to the Internet, this is now true in virtually every industry, but it is especially true in the bicycle industry, where a few dollars of difference is enough to move consumers from one brand to another. According to dealers I’ve spoken to, even industry-leading brands like Trek or Specialized command less than 10% premium at checkout compared to bikes of comparable specification from competitors.

There is as much real differentiation between, say, Coke and Pepsi as there is between a number of competing bike brands.

6: Maximization of profits. In a perfectly competitive market, companies sell at prices where marginal costs meet marginal revenues. In other words, competition keeps profits low and there is a hard cap on maximum profits. I talked about it more in depth in last month’s column, Why wages (and profits) are so low.

7: Homogeneous products. The characteristics of market goods or services do not vary from one supplier to another. This is one of the reasons bike makers are so focused on the thoroughness of materials, tube sections and race teams in their marketing: the brand’s thousand dollar mountain / road / gravel bike. A is roughly the same as that of brand B. There is as much real differentiation between, say, Coke and Pepsi as there is between a number of competing bicycle brands.

8: constant returns to scale. It’s a fancy way of saying that profits don’t increase much as businesses grow. In other words, economies of scale are very ineffective. Besides the order size, there aren’t a lot of additional cost-benefit options. And with increasing order size comes increased operating and capital costs. This is one of the reasons why big bike brands buy from bike shops. Just being bigger doesn’t make them much more profitable, and vertical integration is one of the few ways to increase profits.

As discussed in the previous section, perfect competition is a type of market where many companies sell identical or nearly identical products and where no one has enough market power to be able to set higher prices on their products or services. without losing sales. .

And, whether we like it or not, this is exactly the type of market we have in the bicycle industry. Stay tuned for more on Perfect Competition and Bike 3.0 next month.


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