Competition

Definition and introductory remarks about 'competition' needed

Introduction

Competition is a means by which limited resources can be allocated among rival bidders. The degree to which it is present in a market has a strong influence upon pricing in that market. Unrestricted or perfect competition is a hypothetical condition in which no-one is able to influence the market price of a product. At the other extreme, absolute monopoly, or the total absence of competition in the supply of a product, would give its holder the sole ability to influence the market price of that product. Perfect competition and total monopoly are conditions which can readily be analysed to give definite and straightforward answers, and for that reason they provide a valuable starting-point to the study of the microeconomics of market behaviour. Competition theory is concerned with economic behaviour in markets whose characteristics lie between those hypothetical extremes. Its practical importance lies in the fact that competition or its absence can have a major influence upon the welfare of a community.

Perfect Competition

The hypothetical world with which the concept of perfect competition is concerned is one in which the market for each category of product has the following characteristics:

(a) All market shares are small. No supplier enjoys a share of the market which is large enough to enable him to influence the price of that category of product.

(b) No collusion. Each supplier acts independently.

(c) No barriers to entry. There is nothing to prevent any new supplier from entering the market for any category of product.

(d) Homogeneity of product. All suppliers of each category of product are known to all buyers to supply identical products.

Suppliers are assumed to maximise their products and buyers are assumed to seek value for money. After a settling-down period, a market price emerges for each category of product. A supplier who attempts to sell a product above that price will find no buyers and a buyer who attempts to buy a product at below that price will find no sellers.