Gridlock (economics)
This is an extended usage of the word gridlock, specifically in economics, to describe the common situation that occurs in competition within an industry or a company. A similar usage of gridlock can be seen in politics as well. See also gridlock (Politics). However, the term gridlock was first used in engineering as, "A state of severe road congestion arising when continuous queues of vehicles block an entire network of intersecting streets, bringing traffic in all directions to a complete standstill; a traffic jam of this kind."[1]
In microeconomics, gridlock refers to the difficult situation firms face when trying to invest in long-term and sustainable business, especially in a fiercely competitive industry where most firms focus on short-term returns. It is very hard for any player to make a move towards a sustainable and healthy direction, since if one party initiates a long-term investment that is not very profitable in the short-term, other competitors can easily take advantage of the situation to outcompete that firm and even drive it out of the market. As a result, no party will take the risk to make a move. This phenomenon is also called first-mover disadvantage. In the end, the unhealthy situation of the industry can hardly be improved by the market leaders themselves. In business, as in traffic, when gridlock happens, an industry is unable to function at a healthy level, which can be highly problematic and costly.
Not only in an industry, gridlock can also happen at the company level. If several groups with conflicting interests exist within one company, competing to gain control and power, this can create a situation in which business transactions cannot be completed until the problem is solved.[2]
This kind of dilemma is also very often cited in game theory. If all parties can cooperate, for example, companies can collaboratively invest in a sustainable way, the gridlock can be easily solved and the industry will function in a healthy way. But this is not happening because of the desire to maximize one's own benefit, given the uncertainty about others’ commitment to cooperation.
Solution
Naturally, to solve this problem, it requires institutions within the industry or company to regulate rules and prevent the inefficient situation from happening. Thus, institutions play the role of traffic lights or traffic police in the conjunction of the business world.
In the book Institutional Economics: An Introduction, professors John Groenewegen, Antoon Spithoven, and Annette van den Berg explain approaches to analyzing this kind of situation and suggest solutions to similar problems from an institutional perspective. See also Institutional economics.
References
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