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Competition: An Introduction
RUPENDRA SINGH ASST. PROF. What is Competition?
The process of rivalry between firms striving to
gain sales and make profits Motive: self-interest, but outcome mostly beneficial for the society Competition is not just an event, but a process It is not automatic – needs to be nurtured. Competition was defined by the court as a process that required the numerous participants and decentralization. Competition is the engine of free enterprise.
2 From an economist perspective, competition involves a process of business rivalry between the firms that strive to wins customers' business by achieving the lowest level costs and prices, developing new products or services or exploiting particular strengths, skills or other advantage to meet customer’s need more effectively than competitors. The economic rationale behind a free market economy is that freely operating markets will result in the most efficient allocation of a nation’s scarce resources and will bring consumers the widest variety of choices and the lowest possible process. Competition forces the market players to search for better permutation and combination for providing greater profits through greater efficiency. A part from free market system, competition law also has social purposes. The social purpose rationale for competition law finds its introduction in the passage of Justice Hands in the United States V Aluminium Co. of America, “where he preferred the preservations of small business over the preservation of free market. He stated that “throughout the history of these statutes it has been constantly assumed that one of their purposes was to perpetuate and preserve, for its own sake and in spite of possible cost, an organisation of industry in small units which can effectively compete with each other” Types of Competition
Price Competition: Winning customers by
lowering price
Non-price Competition: Winning customers by
advertising, offering after-sales-services, using sale promotion tools, etc.
6 Ways of Competition
Fair Competition: Fair means such as producing quality
goods, becoming cost-efficient, optimising the use of resources, best technology, research & Development, etc.
Unfair Competition: Unfair means such as fixing price
with the rivals, predatory pricing, disparaging or misleading advertisements, etc.
7 Benefits from Competition
Efficiency Innovation Check on concentration Economic growth (wealth and job creation) Consumer welfare gains: Lower prices, Better quality, Freedom of choice and Easy access
8 CERTAIN ASSUMPTIONS IN ECONOMICS Economists assume that there are a number of different buyers and sellers in the marketplace.
This means that we have competition in the market,
which allows price to change in response to changes in supply and demand.
Furthermore, for almost every product there are
substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead.
In a market with many buyers and sellers, both the
consumer and the supplier have equal ability to influence price. In some industries, there are no substitutes and there is no competition.
In a market that has only one or few
suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods. MONOPLOY, OLIGOPOLY AND PERFECT COMPETITION A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a In an oligopoly, there are only a few firms that make up an industry.
This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry.
The products that the oligopolistic firms produce are often
nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces.
Assume, for example, that an economy needs only 100 widgets.
Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well. There are two extreme forms of market structure: monopoly and, its opposite, perfect competition.
Perfect competition is characterized by many buyers and sellers,
many products that are similar in nature and, as a result, many substitutes.
Perfect competition means there are few, if any, barriers to entry
for new companies, and prices are determined by supply and demand.
Thus, producers in a perfectly competitive market are subject to
the prices determined by the market and do not have any leverage.
For example, in a perfectly competitive market, should a single firm
decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits 1. All firms sell an identical product. 2. All firms are price takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit. It is also referred as “PURE COMPETITION”. Competition Law
Aims to protect process of competition and not
competitors Consist of a set of rules to curb Anti Competitive Practices (ACPs) Sets up the Competition Authority: Competition Commission of India (CCI) and National company law tribunal (NCLAT) Over 120 countries have adopted Competition Law
