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Addressing Market Failures Holds the Key

Sep 19-2025   



*This article is compiled from the content of Tencent Finance.

Causes of Involution: Excess Supply Drives Firms to Compete for Market Share

How does preventing vicious competition through involution differ from past economic cycles where competition stemmed from overcapacity?

Huang Yiping: The recent wave of low-price competition has a prominent macroeconomic backdrop: supply exceeding demand. With an abundance of products on the market, companies must seek out new markets and inevitably resort to price-cutting competition. This supply-demand imbalance has persisted for a prolonged period and spans multiple sectors, intensifying competition as all market participants vie for a share of it.

Price indices such as PPI and CPI have remained low in recent years. Do you consider corporate price-cutting competition to be a contributing factor to this low inflation?

Huang Yiping: The rapid expansion of the platform economy has intensified competition among businesses and merchants operating on these platforms. Whereas in the earlier online economy, low prices might have been localized or regional, the platform economy has amplified the risks of systemic price-cutting.

 

Dangers of Price Wars: The lowest Price across the Entire Network Creates a Vicious Cycle

What are the dangers of price wars, particularly the intense competition associated with the platform economy?

Huang Yiping: I believe this relates to the characteristics of the platform economy. Nobel laureate George Akerlof proposed the theory of the 'lemons market'. Using the used car market as an example, he noted that, due to a lack of information about quality, consumers tend to favour cheaper vehicles. Consequently, higher-quality but pricier used cars become difficult to sell, forcing sellers to eventually lower their prices. This creates a downward spiral in which both market prices and product quality deteriorate. This is precisely our concern with internalization — ultimately, it undermines the quality of economic development.

Do you believe the price war model has any positive aspects, and what negative consequences might it have?

Huang Yiping: Some platforms gain market share through substantial subsidies, which is an unsustainable practice requiring regulatory intervention. From an economic perspective, this relates to the 'lemons market' issue I mentioned earlier. If all e-commerce platforms were to adopt a strategy of offering the lowest prices across their entire networks, it could cause very serious problems.

Through general equilibrium analysis, we can observe a clear chain reaction that falling prices force manufacturers to reduce costs by cutting quality. Crucially, they will not increase investment, hire more staff or raise wages. Ultimately, this reduces consumer income and triggers economic contraction—a vicious cycle that demands urgent attention.

 

Escaping the Low-price Trap: Conveying Quality Information to Consumers

How does low-price competition within the platform economy impact the platforms themselves and the merchants operating on them?

Huang Yiping: The strength of platforms lies in their formidable economies of scale. However, if they rely on the short-term exploitation of opportunities and interests from other economic partners, achieving sustainable long-term development becomes difficult. This necessitates joint efforts from platforms, enterprises and government regulators to foster a healthy ecosystem.

Such low prices can resemble a trap. How can we reverse this vicious cycle and escape it?

Huang Yiping: The first step is to balance supply and demand by resolving the current supply surplus. In this regard, recent government efforts to stimulate consumption are entirely correct. Secondly, we must send clear quality signals to the market. If businesses and platforms provide more information about product quality, consumers can choose goods that meet their requirements in terms of both quality and price.

Against the backdrop of rapid advancements in artificial intelligence and big data, which digital technologies do you think are most likely to help the consumer market escape this vicious cycle?

Huang Yiping: Artificial intelligence and big data can facilitate the dissemination of quality signals, enhancing transparency in quality information. Price information can reflect quality, but this requires relative transparency in quality data.

 

Enterprises Transcending Involution: Recommendations for Cultivating Global South Markets & Multi-Dimensional Innovation

How should industries and enterprises be guided against involution and overcapacity?

Huang Yiping: If the fundamental contradiction of oversupply remains unresolved, guiding enterprises will inevitably prove challenging. At this stage, I believe that solutions could focus on creating new demand. Given the current limitations of European and American markets, enterprises could prioritize markets in the Global South. Could we help these countries transition to new energy sources by providing government aid, policy-driven credit and fully market-driven investment? This would not only support global sustainable development but also open up new markets.

From an enterprise perspective, how can we encourage businesses to move away from price competition and towards innovation and quality?

Huang Yiping: Low-price competition itself reflects insufficient innovation momentum. Innovation should be comprehensive. This does not necessarily involve original technological breakthroughs, but can also include enhancing specific product qualities, optimizing management processes or improving efficiency.

Therefore, not every enterprise needs to pursue cutting-edge technologies such as those offered by DeepSeek or Yushu Technology. Most businesses can achieve significant results by leveraging existing technologies and management methods to improve efficiency and quality.

Addressing Market Failures Holds the Key

Sep 19-2025   



*This article is compiled from the content of Tencent Finance.

Causes of Involution: Excess Supply Drives Firms to Compete for Market Share

How does preventing vicious competition through involution differ from past economic cycles where competition stemmed from overcapacity?

Huang Yiping: The recent wave of low-price competition has a prominent macroeconomic backdrop: supply exceeding demand. With an abundance of products on the market, companies must seek out new markets and inevitably resort to price-cutting competition. This supply-demand imbalance has persisted for a prolonged period and spans multiple sectors, intensifying competition as all market participants vie for a share of it.

Price indices such as PPI and CPI have remained low in recent years. Do you consider corporate price-cutting competition to be a contributing factor to this low inflation?

Huang Yiping: The rapid expansion of the platform economy has intensified competition among businesses and merchants operating on these platforms. Whereas in the earlier online economy, low prices might have been localized or regional, the platform economy has amplified the risks of systemic price-cutting.

 

Dangers of Price Wars: The lowest Price across the Entire Network Creates a Vicious Cycle

What are the dangers of price wars, particularly the intense competition associated with the platform economy?

Huang Yiping: I believe this relates to the characteristics of the platform economy. Nobel laureate George Akerlof proposed the theory of the 'lemons market'. Using the used car market as an example, he noted that, due to a lack of information about quality, consumers tend to favour cheaper vehicles. Consequently, higher-quality but pricier used cars become difficult to sell, forcing sellers to eventually lower their prices. This creates a downward spiral in which both market prices and product quality deteriorate. This is precisely our concern with internalization — ultimately, it undermines the quality of economic development.

Do you believe the price war model has any positive aspects, and what negative consequences might it have?

Huang Yiping: Some platforms gain market share through substantial subsidies, which is an unsustainable practice requiring regulatory intervention. From an economic perspective, this relates to the 'lemons market' issue I mentioned earlier. If all e-commerce platforms were to adopt a strategy of offering the lowest prices across their entire networks, it could cause very serious problems.

Through general equilibrium analysis, we can observe a clear chain reaction that falling prices force manufacturers to reduce costs by cutting quality. Crucially, they will not increase investment, hire more staff or raise wages. Ultimately, this reduces consumer income and triggers economic contraction—a vicious cycle that demands urgent attention.

 

Escaping the Low-price Trap: Conveying Quality Information to Consumers

How does low-price competition within the platform economy impact the platforms themselves and the merchants operating on them?

Huang Yiping: The strength of platforms lies in their formidable economies of scale. However, if they rely on the short-term exploitation of opportunities and interests from other economic partners, achieving sustainable long-term development becomes difficult. This necessitates joint efforts from platforms, enterprises and government regulators to foster a healthy ecosystem.

Such low prices can resemble a trap. How can we reverse this vicious cycle and escape it?

Huang Yiping: The first step is to balance supply and demand by resolving the current supply surplus. In this regard, recent government efforts to stimulate consumption are entirely correct. Secondly, we must send clear quality signals to the market. If businesses and platforms provide more information about product quality, consumers can choose goods that meet their requirements in terms of both quality and price.

Against the backdrop of rapid advancements in artificial intelligence and big data, which digital technologies do you think are most likely to help the consumer market escape this vicious cycle?

Huang Yiping: Artificial intelligence and big data can facilitate the dissemination of quality signals, enhancing transparency in quality information. Price information can reflect quality, but this requires relative transparency in quality data.

 

Enterprises Transcending Involution: Recommendations for Cultivating Global South Markets & Multi-Dimensional Innovation

How should industries and enterprises be guided against involution and overcapacity?

Huang Yiping: If the fundamental contradiction of oversupply remains unresolved, guiding enterprises will inevitably prove challenging. At this stage, I believe that solutions could focus on creating new demand. Given the current limitations of European and American markets, enterprises could prioritize markets in the Global South. Could we help these countries transition to new energy sources by providing government aid, policy-driven credit and fully market-driven investment? This would not only support global sustainable development but also open up new markets.

From an enterprise perspective, how can we encourage businesses to move away from price competition and towards innovation and quality?

Huang Yiping: Low-price competition itself reflects insufficient innovation momentum. Innovation should be comprehensive. This does not necessarily involve original technological breakthroughs, but can also include enhancing specific product qualities, optimizing management processes or improving efficiency.

Therefore, not every enterprise needs to pursue cutting-edge technologies such as those offered by DeepSeek or Yushu Technology. Most businesses can achieve significant results by leveraging existing technologies and management methods to improve efficiency and quality.