Adjacent
advertisements in an 1885 newspaper for the makers of two competing ore
concentrators (machines that separate out valuable ores from undesired
minerals). The lower ad touts that their price is lower, and that their
machine's quality and efficiency was demonstrated to be higher, both of
which are general means of economic competition.
In economics, competition is a condition where different economic firms seek to obtain a share of a limited good by varying the elements of the marketing mix:
price, product, promotion and place. In classical economic thought,
competition causes commercial firms to develop new products, services
and technologies, which would give consumers greater selection and
better products. The greater selection typically causes lower prices for
the products, compared to what the price would be if there was no
competition (monopoly) or little competition (oligopoly).
Early economic research focused on the difference between price-
and non-price-based competition, while later economic theory has focused
on the many-seller limit of general equilibrium.
Role in market success
Competition is generally accepted as an essential component of markets, and results from scarcity—there
is never enough to satisfy all conceivable human wants—and occurs "when
people strive to meet the criteria that are being used to determine who
gets what." In offering goods for exchange, buyers competitively bid
to purchase specific quantities of specific goods which are available,
or might be available if sellers were to choose to offer such goods.
Similarly, sellers bid against other sellers in offering goods on the
market, competing for the attention and exchange resources of buyers.
The competitive process in a market economy exerts a sort of
pressure that tends to move resources to where they are most needed, and
to where they can be used most efficiently for the economy as a whole.
For the competitive process to work however, it is "important that
prices accurately signal costs and benefits." Where externalities occur, or monopolistic or oligopolistic conditions persist, or for the provision of certain goods such as public goods, the pressure of the competitive process is reduced.
In any given market, the power structure will either be in favor of sellers or in favor of buyers. The former case is known as a seller's market; the latter is known as a buyer's market or consumer sovereignty. In either case, the disadvantaged group is known as price-takers and the advantaged group known as price-setters.
Competition bolsters product differentiation as businesses try to
innovate and entice consumers to gain a higher market share. It helps
in improving the processes and productivity as businesses strive to
perform better than competitors with limited resources. The Australian
economy thrives on competition as it keeps the prices in check.
Historical views
In his 1776 The Wealth of Nations, Adam Smith described it as the exercise of allocating productive resources to their most highly valued uses and encouraging efficiency, an explanation that quickly found support among liberal economists opposing the monopolistic practices of mercantilism, the dominant economic philosophy of the time. Smith and other classical economists before Cournot
were referring to price and non-price rivalry among producers to sell
their goods on best terms by bidding of buyers, not necessarily to a
large number of sellers nor to a market in final equilibrium.
Later microeconomic theory distinguished between perfect competition and imperfect competition, concluding that perfect competition is Pareto efficient while imperfect competition is not. Conversely, by Edgeworth's limit theorem, the addition of more firms to an imperfect market will cause the market to tend towards Pareto efficiency.
Appearance in real markets
Real
markets are never perfect. Economists who believe that in perfect
competition as a useful approximation to real markets classify markets
as ranging from close-to-perfect to very imperfect. Examples of
close-to-perfect markets typically include share and foreign exchange
markets while the real estate market is typically an example of a very
imperfect market. In such markets, the theory of the second best
proves that, even if one optimality condition in an economic model
cannot be satisfied, the next-best solution can be achieved by changing
other variables away from otherwise-optimal values.
Time variation
Within competitive markets, markets are often defined by their sub-sectors, such as the "short term" / "long term",
"seasonal" / "summer", or "broad" / "remainder" market. For example,
in otherwise competitive market economies, a large majority of the
commercial exchanges may be competitively determined by long-term
contracts and therefore long-term clearing prices. In such a scenario, a
“remainder market” is one where prices are determined by the small part
of the market that deals with the availability of goods not cleared via
long term transactions. For example, in the sugar industry,
about 94-95% of the market clearing price is determined by long-term
supply and purchase contracts. The balance of the market (and world
sugar prices) are determined by the ad hoc demand for the
remainder; quoted prices in the "remainder market" can be significantly
higher or lower than the long-term market clearing price.
Similarly, in the US real estate housing market, appraisal prices can
be determined by both short-term or long-term characteristics, depending
on short-term supply and demand factors. This can result in large
price variations for a property at one location.
Anti-competitive pressures and practices
Competition requires the existing of multiple firms, so it duplicates fixed costs.
In a small number of goods and services, the resulting cost structure
means that producing enough firms to effect competition may itself be
inefficient. These situations are known as natural monopolies and are usually publicly provided or tightly regulated.
The printing equipment company American Type Founders explicitly states in its 1923 manual that its goal is to 'discourage unhealthy competition' in the printing industry.
International competition
also differentially affects sectors of national economies. In order to
protect political supporters, governments may introduce protectionist measures such as tariffs to reduce competition.
Anti-competitive practices
A practice is anti-competitive if it unfairly distorts free and effective competition in the marketplace. Examples include cartelization and evergreening.
