Imagine a crowded theater where one person stands up to get a better view. Soon, everyone follows suit, and the result is that everyone is standing, yet no one can see better than before. The only change is that watching the show has become more tiring.
This analogy aptly describes China's current debate over "involutionary" competition — a scenario where businesses continuously intensify their efforts without meaningful gains.
In recent months, regulators have stepped up scrutiny of subsidy-driven price wars among e-commerce platforms and penalized unfair competitive practices. The aim is not to stop companies from lowering prices but to prevent price cuts from becoming a contest that drains resources while doing little to improve products, services or productivity.
Low prices per se are not a problem. A new electric-vehicle maker may cut prices to enter the market or a retailer may offer discounts to clear inventory. Such strategies can benefit consumers and give new businesses a foothold. Competition is doing its job when lower prices reflect greater efficiency, better technology or a genuine effort to attract customers.
The problem begins when companies cut prices primarily because their rivals have done so. One company lowers its prices to protect market share, prompting others to follow suit to avoid losing customers. If none of the companies has a lasting cost advantage, the battle may leave their relative positions unchanged while shrinking profit margins across the industry. The market becomes busier, but not necessarily more productive.
This pattern has emerged in industries ranging from steel and cement to solar panels, batteries and electric vehicles. It has also taken hold in services such as delivery and ride-hailing, where platforms compete for users through discounts and subsidies. In some cases, opaque pricing practices and algorithmic tools make it harder for consumers and regulators to understand how prices are set. What looks like a bargain today may come at the expense of smaller merchants, sustainable business models or meaningful improvements in service.
The deeper problem is that some price wars can continue long after they become commercially untenable. A business that consistently sells below cost would normally have reason to rethink its strategy. But that calculation changes when losses are cushioned by preferential policies or other forms of external support.
Local governments have valid reasons to attract investment and foster industries suited to their economies. Yet, the pursuit of growth can become counterproductive when local officials compete to offer increasingly generous incentives, regardless of a project's commercial viability. One locality supports a favored industry; others respond with incentives of their own, hoping to keep investment and jobs at home. Companies gain room to maintain aggressive pricing, but the advantages may cancel each other out. Public funds are spent, fiscal pressures increase, and the underlying imbalance between supply and demand remains.
This situation reflects a costly mismatch of incentives. Companies aim to survive and expand, while local governments seek economic development. Both may be pursuing reasonable immediate goals. But when public support allows businesses to sustain a price war that the market would otherwise force them to reconsider, the result can be wasteful competition rather than industrial progress.
Digital platforms make the problem even more complex. At scale, they can connect buyers and sellers more efficiently, widen consumer choice and help smaller businesses reach new markets. Government policies can also be a legitimate way to attract users or introduce a service. The question is whether a platform is winning customers by becoming more efficient or by sustaining losses that competitors cannot afford to match. If aggressive discounts help drive rivals out, a platform may face less pressure to keep prices low later. Consumers might benefit in the short term yet lose some of those gains as market choices narrow.
Regulation must therefore look beyond the price tag. A discount should not be deemed unfair simply because it is steep, nor should every aggressive pricing strategy be presumed unlawful. Authorities need to examine the circumstances, conduct and effects of particular practices while enforcing rules against price violations and unfair competition. Clearer standards and consistent enforcement are especially important in platform markets, where pricing mechanisms can be difficult to scrutinize.
The same discipline should apply to government support. Localities need to evaluate preferential policies against fair-competition requirements, rather than competing to protect individual companies at the expense of the wider market. Industry associations should not coordinate prices or restrict businesses' legitimate pricing decisions. In sectors with excess capacity and weak demand, addressing the imbalance is also essential. Rules can curb misconduct, but they cannot by themselves make an oversupplied market healthy.
China's effort to curb involutionary competition is more than just policing price wars. It tests whether market competition and government action can complement rather than undermine each other. Markets need room for businesses to compete, fail and innovate, while governments must set fair rules and resist the temptation to preserve short-term advantages through support that distorts competition.
The objective is not to make competition gentler but to make it more productive. When prices fall because companies have found better ways to serve customers, the economy gains. But when they fall because businesses feel compelled to follow rivals into a race sustained by public money and mounting losses, the apparent bargain may be much more expensive than it looks.
The author is a professor at the School of Public Administration and Policy, Renmin University of China.
The views don't necessarily reflect those of China Daily.
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