Greg Mankiw gives his favorite example of competition in his latest column:
Granted, competition is not always good for producers. I produce economics textbooks. I curse the fact that my competitors are constantly putting out new, improved editions that threaten my market share. But knowing that I have to keep up with the Paul Krugmans and the Glenn Hubbards of the world keeps me on my toes. It makes me work harder, benefiting the customers — in this case, students. The upshot is that competition among economics textbooks makes learning the dismal science a bit less dismal.
From my perspective, this is the wrong example for how competition benefits consumers. To be sure, there are competitive forces in the textbook market, but the textbook market is far from a model of perfect competition. The textbook market is more like the market for pharmaceuticals, and the analogies run deep. In case you are unfamiliar, here are the salient features of the textbook market (along with how big pharma marketing is similar):
- Professors -- not students -- make decisions about which textbook to adopt for a class. From the standpoint of quality of content, this is likely optimal. After all, the professor knows more about the subject, and should be better positioned to know what constitutes a comprehensive and useful treatment of the material.
- Professors are like doctors, while students are like patients in the parallel universe that is the market for pharmaceuticals.
- The market for pharmaceuticals is slightly different, but ends up with the same tension / emphasis on quality rather than price. Doctors don't care directly about price, but nor do patients (really) because a third party usually heavily subsidizes the cost of the drugs.
- This is not unlike how the pharma industry treats doctors -- although doctors probably get better treatment. To my knowledge, professors are not solicited by gifts like watches or golf clubs (see Table 2 of link).