Competition in Markets

Competition within a market refers to a position whereby there are multiple firms, with rivalrous relations, attempting to hold the largest market share, whilst also retaining high levels of profit in the long-run.

 In a competitive market, there is an incentive for firms to lower prices, improve quality, and innovate new ideas in order to attract customers and widen their share within the market. This dynamic promotes efficiency within a market and sees a more productive allocation of the factors of production. This is crucial for ensuring that consumer welfare demands are met and exceeded within an economy which in turn will boost consumer spending, leading to an increase in economic growth. Alongside the thriving levels of efficiency and growth, competition also advances efforts made towards new technologies within an economy which can further boost the worth of a country’s infrastructure in comparison with alternative economies. This advancement will see increased foreign investment which will provide added growth to an economy.

Antitrust laws are one of the methods used my governments to control competition. Such as the Sherman Antitrust Act established by the U.S congress in 1890 which saw an increase in the ability for competition to be left to its own devices, following this Act, the US saw considerable advancements in their economic status prior to the depression of 1893. Controlling competition allows a market to ensure that price fixing, market allocation, and monopolisation don’t occur as these can prohibit consumer welfare due to reduced innovation, increased inflationary pressure, and decreased choice of selection. 

A second method to control competition is through regulatory policies. These policies ensure that minimum levels of quality and safety in the workspace are met. Examples include the 48-hour week cap (which can be opted out of), and the fact that gender mainstreaming is not allowed in many industries. These policies help to create transparency through firms to allow consumers to carry out rational decision making in their purchases.

However, promoting competition can also have its costs. In certain industries such as telecoms/transportation, natural monopolies often exist due to high levels of fixed costs and economics of scale. In these cases, promoting competition may not be feasible or desirable, as it can lead to an increase in price whilst simultaneously experiencing a decrease in the quality of a product or service. Also, firms may implement penetration-pricing to eliminate competitors which decreases consumer welfare and prohibits the growth of an economy in the long-run.

Because of these reasons, policymakers face a trade-off as they must assess the opportunity cost of implementing policies into a market. This is because it is in their best self-interest to boost competition to allow consumer welfare to develop; however, the cost of this must be considered as market failure may occur if costs to firms are too high for them to maintain profits. In addition, because of the increased inflationary pressure, a balance point of policies must be calculated to prevent prices uncontrollably rising/falling. Ultimately, a competitive market can lead to an increased level of economic prosperity and consumer welfare, but achieving this requires a careful analytical balance of competing interests and a deep understanding of the market dynamics.


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