Types of Competition in Economics

Types of Competition in Economics
There are several different types of competition in economics, which are largely defined by
how many sellers there are in a market. For example, in a monopoly, there is just one
business controlling the market with no competition at all. This one business is able to set
higher prices and earn better profits. However, the more businesses that enter a market, the
more competition there is. Competition lowers prices as businesses compete for customers
and market share. It’s important for business owners and consumers to
understand competition in economics and how it affects different markets.
What Is Competition in Economics?
Competition in economics happens when a market has a sufficient number of buyers and
sellers so that prices remain low. When there are a large number of sellers, consumers have
many options, which means companies have to compete to offer the best prices, value and
service. Otherwise, consumers will go to the competition. When consumers enjoy many
choices, businesses must remain on their toes and continue to offer the best prices. In this
way, competition self-regulates the supply and demand of markets, keeping goods
affordable for consumers. This is called the invisible hand theory.
Under a truly competitive market, no one company is able to exploit prices because
consumers always have a choice to go somewhere else. There must be a healthy amount of
competition in a market for this to work. Certain markets may not have as much
competition, thus driving up prices.
What Is Perfect Competition?
Perfect competition happens when there are many sellers of nearly identical products.
Because of so many companies selling similar products, there are many substitutes
available for consumers. Prices are controlled by supply and demand, and are generally low
for consumers. One example of this is apple farming. If there are several apple farms in a
geographic region, they will have to price their products competitively. When one farm
prices their apples too high, consumers will go to another farm. There are abundant
options, meaning substitutes are easy to come by. The lower priced apple farm will sell the
most product, and other farms must keep up by lowering their prices, too. This may require
farms to lower operating costs or be run out of business.
Of course, it’s important to note that things don’t usually work this way in the real world.
Perfect competition is purely theoretical. Through marketing, brands are able to
differentiate their products, thus convincing consumers to pay higher prices. For example,
one farm might choose to place a premium on a special type of apple. Perhaps they have
the best product in the region or they create an exceptional and unique hybrid apple. Some
consumers will be drawn to what they perceive as a higher quality product and pay extra
for it. This is especially true with gourmet or artisanal food products.
What Is Monopolistic Competition?
Monopolistic competition is a market where there are many competitors, but each company
sells a slightly different product. A few examples of businesses involved in monopolistic
competition are restaurants, retail shops, salons and consumer electronics. Each of these
groups of businesses are in competition with one another. For example, say there are two
restaurants across the street from one another. One is Greek and the other is Mexican. They
are each competing for customers, but their businesses aren’t exactly perfect substitutes for
one another. They offer two totally different types of cuisine, and perhaps even two
different price points and dining experiences.
In monopolistic competition, there is a relatively low barrier of entry for businesses. If a
company significantly raises their prices, many consumers will likely go elsewhere.
What Is Oligopoly?
is a market where there are more than two competitors, but no more than a
handful. Usually, oligopoly markets have a high barrier to entry.
Usually, governments set laws that prohibit oligopolies from engaging in price fixing or
collusion.
What Is Monopoly?
A monopoly exists when there is only one company covering an entire market. This
company is the sole market for the product and can set prices without any
competition. This lack of consumer choice usually results in high prices. Sometimes a
business is a monopoly because the barrier to entry is too great for other companies to enter
the market and compete. Other times, a monopoly is artificially created, such as when a
government is the sole controller of a product, like electricity, mail delivery or
gas. Another reason monopolies exist is that one company has a patent on a product, and
that patent protects the company from others entering the market and creating price
competition.
Sometimes, a particularly large and profitable company will buy up all the competition,
effectively taking over a market. This company is then a monopoly, able to effectively set
prices however they want. Antitrust laws are meant to prevent monopolies and protect
consumers from their effects. Markets must continue to be open to new competitors if
prices are to stay low and goods are to remain affordable.
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