Competition

Published Mar 22, 2024

Definition of Competition

Competition in economics refers to the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion. It is the driving force behind innovation, efficiency, and improvement in products and services. In a competitive market, no single agent has the power to influence the price of goods and services significantly.

Example

To understand competition, consider the smartphone market. Various companies like Apple, Samsung, Xiaomi, and Huawei compete against one another. They frequently introduce new models with better cameras, longer battery life, or novel features to outdo each other. This constant innovation helps to improve product quality and reduce prices over time, benefiting consumers.

Moreover, competition in the smartphone market drives companies to improve customer service, offer more attractive warranties, and reduce prices, all of which benefit the consumer. For instance, when one company introduces a phone with a breakthrough technology, competitors are pressured to match or exceed this innovation, leading to rapid advancements in technology and better choices for consumers.

Why Competition Matters

Competition is crucial because it fosters a culture of innovation and customer-oriented improvements. By continuously striving to outperform rivals, companies develop new technologies, enhance product quality, and improve service standards, pushing the industry forward. It brings several benefits, including lower prices, better quality products and services, more choices for consumers, and the efficient allocation of resources.

Without competition, monopolies or oligopolies might dominate markets, leading to higher prices and less incentive for innovation. Therefore, competition not only benefits consumers by providing more options and better prices but also stimulates economic growth.

Frequently Asked Questions (FAQ)

How do governments regulate competition?

Governments regulate competition through antitrust laws and policies aimed at preventing monopolies and promoting a competitive marketplace. Agencies like the Federal Trade Commission in the US, the European Commission’s Competition Directorate-General in the EU, and similar bodies worldwide, oversee mergers, acquisitions, and practices that might restrict competition. They can block mergers that would significantly reduce competition, break up monopolies, and punish companies for anti-competitive practices.

What is the difference between perfect competition and monopolistic competition?

Perfect competition is a theoretical market structure characterized by a complete absence of rivalry. It involves numerous small firms producing identical products, where no single firm can influence the market price. In reality, this model rarely exists but is useful for analytical purposes.

Monopolistic competition, on the other hand, is a more common market structure where many companies sell products that are similar but not identical. These firms have some control over their prices because they can differentiate their products from those of their competitors. Restaurants, for example, belong in this category since they compete not just on price but also on location, cuisine, quality, and service.

Can competition be negative for the market?

While competition is usually beneficial, it can sometimes have negative effects. Excessive competition can lead to wasteful duplication of resources, as companies spend heavily on marketing or creating slightly different versions of the same product. Moreover, in their rush to beat competitors, companies might overlook regulatory compliances or ethical considerations, leading to societal harm.

Furthermore, in industries with high fixed costs, too much competition can hinder the availability of funds for research and development, potentially slowing down innovation. Nevertheless, the positive aspects of competition often outweigh the negatives, emphasizing the importance of a balanced and well-regulated competitive environment.