Understanding Economic Competition and Its Effects

1. What is Economic Competition?

Economic competition is the process of rivalry between undertakings for consumer choice by offering the best possible goods and services.

2. Negative Effects of Lack of Competition

When markets lack effective competition, several negative consequences can arise:

• High Prices (Artificial): Without competition, businesses can artificially inflate prices beyond reasonable levels.
• Low Quality: The absence of competitive pressure can lead to a decline in product or service quality.
• Limited Options for Consumers: Consumers face fewer choices when competition is limited.
• Lack of Innovation: Without the drive to outperform competitors, innovation stagnates.

3. Economic Regulation vs. Competition Policy

While both aim to promote fair and efficient markets, economic regulation and competition policy differ in their approaches:

Regulation

Regulation aims to preserve valued elements within a market through mechanisms like standard setting, information gathering, and behavior modification. (Baldwin, Cave & Lodge)

Competition Policy

Competition policy is a state-driven approach that seeks to guarantee fair competition and free market access.

4. Dynamic vs. Static Competition

Static Competition

Static competition occurs when companies focus on selling goods and services within an existing market. They compete in the market.

Dynamic Competition

Dynamic competition involves companies vying for market power and achieving internal goals. They compete for the market.

5. Characteristics of Perfect Competition

A market exhibiting perfect competition possesses distinct characteristics:

1. Price Takers: Companies have no influence over the price of their products.
2. Market Share and Price: Individual market share does not impact market prices.
3. Informed Consumers: Consumers have complete information about products and prices.
4. Efficiency: Perfect competition leads to both allocative efficiency (optimal resource allocation) and productive efficiency (production at the lowest possible cost).

6. Examples of Collusion

Collusion, an illegal practice, undermines fair competition. Here are examples:

1. Price Fixing: Independent companies secretly agree to raise prices.
2. Output Restriction: Two or more economic agents collude to decrease production, artificially inflating prices.
3. Market Division: Companies divide a market geographically, eliminating competition within those territories.