Competition and Specialization

Competition and specialization are generally positive economics forces. What's interesting is that they are contradictory.

Competition. Company 1 and Company 2 both try to solve problem A. The competition will lead to a better outcome for the consumer.

Specialization. Company 1 focuses on problem A; Company 2 focuses on problem B. The specialization will lead to a better outcome for all because of phenomena like economies of scale and comparative advantage.

So which is better? Is it better to have everyone compete to solve a small number of problems or to have everyone specialize on a unique problem?

Well, you want both. If you have no competition, it's either because you've been able to create a nice monopolostic arrangement for yourself or it's because you're working on a problem no one cares about.

If you have tons of competition, you're probably working on a problem that people care about but that is hard to make a profit in.

Update 8/6/2010: Overspecialization can be bad as well when things don't go according to plan, as NNT points out, Mother Nature does not like overspecialization, as it limits evolution and weakens the animals. If Intel fell into a sinkhole, we'd be screwed if it weren't for having a backup in AMD.