In this section, we have explored the concepts of markets and the decisions to allocate scarce resources in those markets.

Markets have the potential to function efficient. That is, the benefits from consuming a product and the benefits of supplying that product are shared by consumer and supplier. There is no excess or shortage between the quantity supplied on the quantity demanded at a given price.

However, for markets to operate efficiently, they require Competition.

What is Market Competition?

Market competition refers to the presence of suppliers of the same or similar goods in the marketplace.

The idea is that multiple producers or suppliers of goods will compete with each other to make more sales or to gain more customers or clients. We call this increasing Market Share.

Competition results in each competitor using tactics to achieve this objective. The primary tactic is to sell the same product at a lower price than the competitor.

What is Perfect Competition?

Perfect competition is when there are many suppliers of a good or service in the market. The goods are services are not differentiated in any meaningful way. Thus, there is a common, market-wide price for the good in the market.

Any new supplier who enters the market or any existing supplier who wishes to sell more of the good will not be able to charge a higher price for the good than other suppliers. That is, in a perfectly competitive market, suppliers of goods are Price Takers. If they raise their prices at all, it will result in low or no sales.

How Does Competition Among Suppliers Affect Consumers?

When competitors compete, and thus lower their prices, consumers benefit by having access to purchase goods at a lower price.

As we discussed earlier in this series, consumers allocate their scarce resources in the manner they deem to be most efficient or personally beneficial.

When increased competition lowers the price of goods, the consumer benefits by having additional resources to allocate elsewhere. Having these additional resources is thought to increase the consumer’s standard of living.

What Happens When there is Low or No Competition?

Markets in which there is low or no competition are Imperfect.

This allows suppliers to set the price for their goods or services. There are no competitors to force the supplier to push down the prices.

The supplier will generally set the price at a level where the number of sales at that price maximizes the profits or return for the supplier. This quantity and price generally leaves many consumers unable to obtain the goods or services at an acceptable price. Thus, the total consumption and the total benefit to society is lower.

What is a Monopoly or Oligopoly?

A monopoly is a situation where there is only one supplier of a goods or service in the market. An oligopoly is when there are only a few suppliers.

Why and How Does the Government Promote Competition?

Recognizing that competition among competitors increases the benefit and ultimate standard of living of consumers, the government takes steps to promote competition.

They primarily do this through regulation of business practices that are deemed Anticompetitive.

For example, the formation of a monopoly through market competition is completely legal – even though the market effect may be negative. The formation of a monopoly through anti-competitive practices – such as predatory pricing, mergers or integrations with other firms, territorial agreement, agreements between consumers on the amount produced and price charged, etc.

Anticompetitive practices are regulated by the Federal Trade Commission, primarily in the area of Antitrust law. For more detailed information on Antitrust law, check out our business law course.