Competition is an essential component of economic systems based in free-market capitalism. For starters, it generally arises when two or more parties seek to reach a goal which cannot be shared. In economics, competition involves two economic entities, such as business organizations, seek to obtain a share of economic gains.
Benefits of Competition: The Major Reasons Why Free and Open Competition is Beneficial to the Economy
Promotes the Welfare of Consumers
Specific regulatory agencies of governments under free-market economies have maintained the need to promote and protect competition. For example, the Federal Trade Commission of the United States explained that when businesses compete with each other, consumers get the best possible prices, quantity, and quality of goods or services.
The European Commission of the European Union also noted that competition provides consumers with more choices because in a competitive market, businesses would naturally make their products different from the rest.
Other benefits of competition center on compelling businesses to use different variations of the marketing mix to attract a limited number of customers or share of the market. For example, some would focus on offering better prices or promotion while others would concentrate on product strategy such as innovation to make their product offerings more attractive.
Encourages Business Activities
When it comes to the benefits of competition to business activities, it is important to note that these benefits have microeconomic and macroeconomic relevance. Remember that because businesses compete for a limited share of the market, they have to find ways to make their products more appealing to the consumers.
Competition essentially drives innovation. Most businesses would research and develop products not only to address market needs but also to create new opportunities. Hence, because they are perpetually competing for consumers to survive, they are also perpetually innovating.
A competitive market can also drive these businesses to operate efficiently to cut down costs and thus, cut down the prices of their products. Some might invent low-cost manufacturing processes while others might use management strategies such as outsourcing to achieve a competitive advantage.
From a macroeconomic perspective, competition drives economic growth because of its role in fueling business activities. It also enables countries to become globally competitive as businesses also compete against international competitors.
Takeaway: A Note on the Relevance and Benefits of Competition in a Free Market Economic System
It is without a doubt that competition is an integral component of capitalism and the free market. Governments such as the United States and the European Union have developed different policies and created agencies to promote and maintain a competitive market. Examples of these policies include antitrust laws, intellectual property laws, and anti-monopoly laws, among others.
The benefits of competition essentially highlight some of the advantages of capitalism and free market and thus, the disadvantages of restrictive economic systems such as communism and socialism, as well as monopolistic and duopolistic situations in industries and sectors.
It is also important to take note of the fact that the lack of competition is one of the causes of a market failure. By definition, a market failure is an economic situation occurring from an inefficiency in the distribution of goods and services in freely functioning or unhindered markets, thus resulting in an outcome that is not socially optimal or a net social welfare loss.
FURTHER READINGS AND REFERENCES
- Federal Trade Commission. n.d. FTC Fact Sheet: How Competition Works. U.S. Federal Trade Commission. Available via PDF
- European Commission. 2012. “Why is Competition Policy Important for Consumers.” Competition. European Commission. Available online