The Essence of Competition

Competition, the rivalry among businesses for consumers’ dollars, is a vital element in free enterprise. Competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price; those who fail to do so are not able to stay in business. Thus, competition should improve the quality of the goods and services available.

Within a free enterprise system, there are four types of competitive environments:

  1. Pure competition exists when there are many businesses selling one standardized product. No one business sells enough of the product to influence the product’s price. And, because there is no difference in the products, prices are determined solely by the forces of supply and demand.
  2. Monopolistic competition exists when there are fewer businesses than in a pure-competition environment and the differences among the goods they sell is small. The products differ slightly in packaging, warranty, name, and other characteristics, but all satisfy the same consumer need. Businesses have some power over the price they change in monopolistic competition because they can make consumers aware of product differences through advertising. Consumers value some features more than others and are often willing to pay higher prices for a product with the features they want.
  3. Oligopoly exists when there are very few businesses selling a product. individual businesses have control over their products’ price because each business implies a large portion of  the products sold in the marketplace. Nonetheless, the prices charged by different firms stay fairly close because a price cut or increase by one company will trigger a similar response from another company. Oligopoly exists when it is expensive for new firms to enter the marketplace.
  4. Monopoly exists when there is one business providing a product in a given market. Utility companies are monopolies. The government permits such monopolies because the cost of creating the good or supplying the service is so great that new producers cannot compete for sales. Government-granted monopolies are subject to government-regulated prices.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

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