Competition (economics)


Competition (economics), in economics, conditions that are present in markets where buyers and sellers interact to establish prices and exchange goods and services. Economic competition is the means whereby the self-interest of buyers and sellers acts to serve the needs of society as well as those of individual market participants. Society is served when the maximum number of goods is produced at the lowest possible prices.


The theoretical ideal developed by economists to establish the conditions under which competition would achieve maximum effectiveness is known as “perfect” competition. Although rarely possible, perfect competition, as a concept, provides a useful benchmark for evaluating performance in actual markets. Perfect competition exists when (1) an industry has a large number of business firms as well as buyers; (2) the firms on the average are small, and (3) buyers and sellers have complete knowledge of all transactions within the market. The practical significance of a large number of small firms and many buyers is that the power to influence the behaviour of the participants in the market is thoroughly dispersed. In other words, no single person or business has the power to dictate the terms on which the exchange of goods and services takes place (unlike the situation in a monopoly or oligopoly). Market results then are truly impersonal. Under conditions of perfect competition, economists contend, goods and services would be produced as efficiently as possible—that is, at the lowest possible price and cost—and consumers would get the maximum amount of the goods and services they desire.

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The absence of perfect competition in most markets led to a search for a more realistic alternative to evaluate performance in specific instances. In practice, the number of firms tends to be limited, and one firm may exercise undue influence on the market. Participants also rarely have complete knowledge of market conditions. But if the situation is not bad enough to justify state intervention, the level of competition is deemed “workable”. Competition may be workable in the sense that the results achieved are roughly comparable to what is supposed to happen under the theoretical ideal of perfect competition. The chief drawback to the workable-competition concept is its vagueness; no precise criteria have been developed to determine when workable competition actually exists.