Tennis player Steffi Graf demonstrated the impact of positional externality when her winning percentage skyrocketed in the absence of her nemesis, Seles. This phenomenon occurs when one’s own reward depends on the performance of a competitor, and it shows that overheated competition can lead to a waste of resources.
Tennis player Steffi Graf made a lot of money by winning the 1992 championship, but she kept losing to her nemesis, Seles. This made Steffi Graf deeply concerned about playing against Seles while maintaining her own game. Playing against Seles was always a big challenge for her, and this led her to constantly strive to improve her game. However, despite her efforts, her losing streak against Seles put a lot of pressure on her. She began to doubt her abilities and even considered new strategies to get out of the competition.
However, the following year, when Seles suffered a tragic accident and was no longer able to compete, Steffi Graf’s winning percentage almost doubled, even though her game hadn’t changed much. This was a huge turning point for Steffi Graf, and a new chapter in her tennis life began to open. Free from the confrontation with Seles, Steffi Graf no longer felt great psychological pressure and was able to play freely. As a result, her prize money and other ancillary benefits, such as appearing in commercials, increased significantly. This phenomenon is explained by the concept of positional externality.
When a person’s reward is affected by the behavior of others, but they neither receive nor pay for it, it is called externality. In particular, when a person’s reward is partially dependent on the relative performance of other competitors, this is known as positional externality. Steffi Graf’s case is a good example of how her positional reward was significantly boosted by the performance of her competitors. Celes’ absence opened up more opportunities for Steffi Graf, which allowed her to increase her own competitive advantage.
In situations where positional externality is involved, people are inclined to take actions that increase their position. For example, if one competitor increases its spending to improve its performance, this will affect the position of other competitors, causing them to increase their spending as well. In such a race, each competitor commits more resources to better performance, which means that the rewards for individual effort and investment are relatively greater. However, if all competitors repeatedly increase their spending to improve their position at the same time, the actual position among competitors is likely to remain unchanged. And the greater the degree to which each competitor’s positional reward depends on the relative performance of other competitors, the greater the incentive to make such investments.
When positional externality exists, people competitively increase their investment to improve their performance. However, if the gains from competitors’ locations are finite and the investments have no effect on their respective locations, they are likely to be wasteful. In this situation, competition is a necessary process for individuals, but from the perspective of society as a whole, it can lead to a waste of resources. This investment behavior is analogous to an arms race and is called a “positional arms race”. Positional arms races lead to economic inefficiencies from the perspective of society as a whole, because individual incentives differ from those of society as a whole.
Individuals prioritize their own interests over the interests of society as a whole in every decision they make. In a capitalist society, it is desirable for all members to compete for their own benefit, as long as the outcome of the competition can contribute more or less to the society as a whole. However, when competition becomes too intense and no longer serves the interests of society as a whole, excessive investment for personal gain creates inefficiencies that distort the allocation of resources. Moreover, if there are strong positional externalities between individuals, the problem of inefficiency caused by unnecessary competition is even more serious from a societal perspective. When society reaches a stage where it recognizes this seriousness, social norms arise to refrain from competition, or binding social agreements are created to constrain competition. These norms and agreements play an important role in maintaining social stability and can contribute to social efficiency by restraining individuals from competing too much.
