Competition (economics)
Encyclopedia
Competition in economics is a term that encompasses the notion of individuals and firms striving for a greater share of a market to sell or buy goods and services. Merriam-Webster defines competition in business as "the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms." It was described by Adam Smith
in The Wealth of Nations
(1776) and later economists as allocating productive resources to their most highly-valued uses.
and encouraging efficiency. Later microeconomic theory distinguished between perfect competition
and imperfect competition
, concluding that no system of resource allocation is more Pareto efficient than perfect competition
. Competition, according to the theory, 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
).
is seen as a state which produces gains for the whole economy, through promoting consumer sovereignty
. It may also lead to wasted (duplicated) effort and to increased cost
s (and prices) in some circumstances. In a small number of goods and services, the cost structure means that competition may be inefficient. These situations are known as natural monopoly
and are usually publicly provided
or tightly regulated. The most common example is water supplies.
Three levels of economic competition have been classified:
Competition does not necessarily have to be between companies. For example, business writers sometimes refer to "internal competition". This is competition within companies. The idea was first introduced by Alfred Sloan at General Motors in the 1920s. Sloan deliberately created areas of overlap between divisions of the company so that each division would be competing with the other divisions. For example, the Chevy division would compete with the Pontiac
division for some market segment
s. Also, in 1931, Procter & Gamble
initiated a deliberate system of internal brand versus brand rivalry. The company was organized around different brand
s, with each brand allocated resources, including a dedicated group of employees willing to champion the brand. Each brand manager was given responsibility for the success or failure of the brand and was compensated accordingly. This form of competition thus pitted a brand against another brand. Finally, most businesses also encourage competition between individual employees. An example of this is a contest between sales representatives. The sales representative with the highest sales (or the best improvement in sales) over a period of time would gain benefits from the employer.
It should also be noted that business and economic competition in most countries
is often limited or restricted. Competition often is subject to legal restrictions. For example, competition may be legally prohibited as in the case with a government monopoly
or a government-granted monopoly
. Tariffs, subsidies or other protectionist measures may also be instituted by government in order to prevent or reduce competition. Depending on the respective economic policy, the pure competition is to a greater or lesser extent regulated by competition policy and competition law
. Competition between countries is quite subtle to detect, but is quite evident in the World economy
, where countries the US, Japan
, the constituents of the European Union
, China
and the East Asian Tigers
each try to outdo the other in the quest for economic supremacy in the global market, harkening to the concept of Kiasu
ism. Such competition is evident by the policies undertaken by these countries to educate the future workforce. For example, East Asian economies like Singapore, Japan and South Korea tend to emphasize education by allocating a large portion of the budget to this sector, and by implementing programmes such as gifted education
, which some detractors criticise as indicative of academic elitism
.
, and abuse of a dominant position.
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
in The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...
(1776) and later economists as allocating productive resources to their most highly-valued uses.
and encouraging efficiency. Later microeconomic theory distinguished between perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
and imperfect competition
Imperfect competition
In economic theory, imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied...
, concluding that no system of resource allocation is more Pareto efficient than perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
. Competition, according to the theory, 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
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
) or little competition (oligopoly
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
).
Competition in practice
CompetitionCompetition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
is seen as a state which produces gains for the whole economy, through promoting consumer sovereignty
Consumer sovereignty
Consumer sovereignty is a term used in economics. It refers to consumers determining the production of goods. The term can prescribe what consumers should be permitted, or describe what consumers are permitted...
. It may also lead to wasted (duplicated) effort and to increased cost
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s (and prices) in some circumstances. In a small number of goods and services, the cost structure means that competition may be inefficient. These situations are known as natural monopoly
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
and are usually publicly provided
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
or tightly regulated. The most common example is water supplies.
Three levels of economic competition have been classified:
- The most narrow form is direct competition (also called category competition or brand competition), where productProduct (business)In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
s that perform the same function compete against each other. For example, a brand of pick-up trucks competes with several different brands of pick-up trucks. Sometimes two companies are rivals and one adds new products to their line so that each company distributes the same thing and they compete. - The next form is substitute competition, where products that are close substitutes for one another compete. For example, butter competes with margarine, mayonnaise, and other various sauces and spreads.
- The broadest form of competition is typically called budget competition. Included in this category is anything that the consumerConsumerConsumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
might want to spend their available moneyIncomeIncome is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
(the so-called discretionary income) on. For example, a family that has $20,000 available may choose to spend it on many different items, which can all be seen as competing with each other for the family's available money.
Competition does not necessarily have to be between companies. For example, business writers sometimes refer to "internal competition". This is competition within companies. The idea was first introduced by Alfred Sloan at General Motors in the 1920s. Sloan deliberately created areas of overlap between divisions of the company so that each division would be competing with the other divisions. For example, the Chevy division would compete with the Pontiac
Pontiac
Pontiac was an automobile brand that was established in 1926 as a companion make for General Motors' Oakland. Quickly overtaking its parent in popularity, it supplanted the Oakland brand entirely by 1933 and, for most of its life, became a companion make for Chevrolet. Pontiac was sold in the...
division for some market segment
Market segment
Market segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function...
s. Also, in 1931, Procter & Gamble
Procter & Gamble
Procter & Gamble is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of consumer goods....
initiated a deliberate system of internal brand versus brand rivalry. The company was organized around different brand
Brand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
s, with each brand allocated resources, including a dedicated group of employees willing to champion the brand. Each brand manager was given responsibility for the success or failure of the brand and was compensated accordingly. This form of competition thus pitted a brand against another brand. Finally, most businesses also encourage competition between individual employees. An example of this is a contest between sales representatives. The sales representative with the highest sales (or the best improvement in sales) over a period of time would gain benefits from the employer.
It should also be noted that business and economic competition in most countries
Country
A country is a region legally identified as a distinct entity in political geography. A country may be an independent sovereign state or one that is occupied by another state, as a non-sovereign or formerly sovereign political division, or a geographic region associated with a previously...
is often limited or restricted. Competition often is subject to legal restrictions. For example, competition may be legally prohibited as in the case with a government monopoly
Government monopoly
In economics, a government monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law...
or a government-granted monopoly
Government-granted monopoly
In economics, a government-granted monopoly is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of...
. Tariffs, subsidies or other protectionist measures may also be instituted by government in order to prevent or reduce competition. Depending on the respective economic policy, the pure competition is to a greater or lesser extent regulated by competition policy and competition law
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
. Competition between countries is quite subtle to detect, but is quite evident in the World economy
World economy
The world economy, or global economy, generally refers to the economy, which is based on economies of all of the world's countries, national economies. Also global economy can be seen as the economy of global society and national economies – as economies of local societies, making the global one....
, where countries the US, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, the constituents of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
, China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
and the East Asian Tigers
East Asian Tigers
The Four Asian Tigers or Asian Dragons is a term used in reference to the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan. These nations and areas were notable for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s...
each try to outdo the other in the quest for economic supremacy in the global market, harkening to the concept of Kiasu
Kiasu
Kiasu is a Hokkien word that literally means 'fear of losing' . However its actual usage would imply a meaning more approaching that of "dog in a manger", and yet not quite...
ism. Such competition is evident by the policies undertaken by these countries to educate the future workforce. For example, East Asian economies like Singapore, Japan and South Korea tend to emphasize education by allocating a large portion of the budget to this sector, and by implementing programmes such as gifted education
Gifted education
Gifted education is a broad term for special practices, procedures and theories used in the education of children who have been identified as gifted or talented...
, which some detractors criticise as indicative of academic elitism
Academic elitism
Academic elitism is a charge sometimes levied at academic institutions and academics more broadly, arguing that academia or academics are prone to undeserved and/or pernicious elitism; the term "ivory tower" often carries with it an implicit critique of academic elitism...
.
Anti-competitive practices
A practice is anti-competitive if it is deemed to unfairly distort free and effective competition in the marketplace. Examples include cartels, restrictive trading agreements, predatory pricingPredatory pricing
In business and economics, predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices...
, and abuse of a dominant position.