Suppose there are two bakeries which make wedding cakes and other baked items. The pastries from one bakery are pretty much the same as those from another so the baked goods market is quite competitive and margins and profits are thin.

The legislature passes a law allowing businesses to select which customers they will serve and which they will not.

One bakery, bakery A, decides to be selective and the other, bakery B, decides to be non-selective. The fact that bakery A has become selective becomes public knowledge either because the bakery advertises this fact or through word-of-mouth.

Does economic competition eliminate discrimination? This is the question.

Customers who abhor bakery A’s selection criterion boycott bakery A even if in other respects it would be convenient to just get a doughnut from bakery A. So, bakery B, gets additional business it did not get before.

Surely bakery A is suffering and hence should drop its ill-advised selection policy? Not so fast.

Some customers favor bakery A’s policy and they actively seek out bakery A’s products (the “Chick-fil-A” effect). So bakery A loses some customers but gains others. Moreover, the customers it gains are more loyal than the customers who enjoyed its products before it adopted its policy. Similarly, the customers bakery B gains are more loyal too.

Hence, product differentiation has increased because of bakery A’s active adoption of its policy and from bakery B’s decision not to adopt the same policy. The logic of competition now implies both bakeries will make more profits than they did before.

So, discrimination is not driven out by competition between firms. If anything it is reinforced by competition. This stands in contrast to Becker’s model where competition decreases discrimination in employment. (There is some way to make these models consistent by having workers have preferences over co-workers. Maybe someone already did this model?)

Without political or legal intervention, competition will not drive out discrimination.