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Involution

From the Collaborative Bond and Money Market Data Portal

Involution is a situation in which producers engage in increasingly intense competition that leads to greater effort and higher output, but without corresponding gains in productivity, profitability, or demand. This results in excess capacity, falling prices and diminishing returns on capital and labour. It is also referred to as 'price involution' and 'irrational' or 'destructive' competition. Often, the result of involution is the destruction of firms who otherwise provide useful goods and services profitably, but are unable to compete with the undercutting by larger firms who have the capacity to take on greater losses. 

Examples of involution include, but are not limited to:

  • The Chinese electric vehicle (EV) market, where a boom in production led to an overcapacity, without enough demand to satisfy it. This led to manufacturers engaging in aggressive price cuts, sometimes selling at a loss, to unload their excess capacity.
  • The Chinese food delivery market, where intense competition led to constant undercutting to the point of providing goods and services for near-zero, and in some cases zero, cost. 

Some describe involution as "standing in a crowded theatre". Once the first person stands up for a better view, everyone else is forced to do the same, until "everyone is equally uncomfortable but now on their feet".

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