Competition

Understanding Competition

  • Competition can be described as the rivalry among firms trying to sell products or services to the same customers.
  • It operates on two levels: price competition and non-price competition.
  • Price competition involves firms competing with each other to offer the lowest price.
  • Non-price competition is when firms compete through methods other than lowering price, such as improving product quality, branding, advertising, and customer service.
  • Effective competition can lead to efficiency as firms aim to cut costs and avoid waste to be more competitive.
  • More competition can lead to lower prices, improved quality and more choice for consumers.

Types of Market Structures and Competition

  • A perfect competition market has many small firms, all selling an identical product, with easy entry and exit, and perfect knowledge among buyers and sellers.
  • A monopolistic competition market has many firms, selling slightly different products, and there are few barriers to entry or exit.
  • An oligopoly is a market dominated by a few large firms, selling similar or different products, and there are significant barriers to entry.
  • In a monopoly, there’s only one firm that dominates the entire market. Entry into the market is blocked.

Measuring Competition

  • The Concentration Ratio (CR) measures the combined market share of the top firms in an industry.
  • The Herfindahl-Hirschman Index (HHI) is another measure of market concentration.
  • Both measures are used to assess the level of competition in an industry.

Impacts of Competition

  • Consumer Benefits: In competitive markets, companies are incentivised to lower prices and improve product quality.
  • Innovation Encouraged: To stand out from competitors, companies often need to innovate, creating better products.
  • Economic Efficiency: Firms in competitive markets have an incentive to be more efficient to keep costs low and stay competitive.
  • Potential Drawbacks: Too much competition can lead to market instability and business failures.

Regulating Competition

  • Competition policy is designed to protect consumers and small firms, prevent monopolies, promote competition, and regulate mergers.
  • The Competition and Markets Authority (CMA) in the UK is responsible for ensuring competition in markets.
  • Anti-competitive behaviour, like price fixing and forming cartels, is illegal under competition law.

Remember that competition is a key feature of market economies and it plays an important role in stimulating improvements in efficiency, product quality, innovation, and price reductions. It is also closely watched and regulated to ensure fair play and prevent market abuse.