In economics, competition is 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. 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. 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 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).
It is generally accepted that competition results in lower prices and a greater number of goods delivered to more people. Less competition is perceived to exhibit higher prices with a fewer number of goods delivered to fewer people.
Competition in practice
Competition 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 costs (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:
- The most narrow form is direct competition (also called category competition or brand competition), where products 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 consumer might want to spend their available money (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 division for some market segments. Also, in 1931, Procter & Gamble initiated a deliberate system of internal brand versus brand rivalry. The company was organized around different brands, 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 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 Kiasuism.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.
Within competitive markets, markets are often defined by their sub-sectors, such as the "short-term" or "long-term" market, the "seasonal" or "summer" market, or the "broad" or "remainder" market. For example, in otherwise competitive market economies, where a large majority of the commercial exchanges are competitively determined by long term contracts and therefore long term market clearing prices, a “remainder market” is one where prices are determined by the small part of the market that deals with the availability of whatever is not cleared via long term transactions. For example, in the sugar industry, about 94% to 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 5% to 6% that is not sold via long term contracts; prices in the “remainder market” fluctuate more widely and are determined by short term supply and demand conditions; quoted prices 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.
A practice is anti-competitive if it is deemed to unfairly distort free and effective competition in the marketplace. Examples include cartelization (collusion among companies producing the same product or services to fix the price of goods or services intended to mutual higher profit), restrictive trading agreements, predatory pricing, and abuse of a dominant position.
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