system, producers are free to make decisions. This freedom creates competition among businesses as they pursue the same goal of selling goods or services.
A typical example of competition is the long-running contest between soda products Coca-Cola and Pepsi. The two companies that produce these popular beverages have engaged in direct competition with each other for over 100 years. Of course, there are lots of other drinks available, too, and Coke and Pepsi compete against all the available options for the biggest share of the multibillion dollar soda market.
Businesses want as big a share as possible in order to maximize profit. They clash in the free market to get consumers to purchase their goods and services instead of those offered by their rivals. Competition pushes businesses to be as efficient as possible so they can offer the lowest prices. It also drives them to develop new products and services in order to keep attracting new customers.
What Kind of Competition?
Competition is a clash of rivals pursuing the same goal, but not all competitions are the same. The way rivals compete depends on their goals and the number of competitors.
In a football game, for instance, two teams compete to score the most points. In a 100-meter race, on the other hand, there might be as many as nine runners competing against each other, and also the clock. While there is no victory for finishing in second place in a football game, in a foot race there is. You may not be the very fastest if you place second or even third, but you have beaten many competitors.
Businesses compete to make as much profit as possible. The amount of profit they can make depends on the kind of competition they face. The nature of competition faced by different businesses in different markets is known as the market structure.
Different markets are like different sports. The nature of the competition depends on the number of competitors. The competitors are always trying to maximize revenue and profit, but the number of other businesses selling the same things varies.
Economic competition comes in two different types: competition among the few and competition among the many. In a market with only a few producers making a specific thing, each producer has some control over the price. The distinction between a few producers and many producers tells us about the basic market structure.
But we can be even more specific about the types of competition. One extreme type of market structure is called a monopoly. When only a single producer sells a good or service, there is no competition at all. That is a monopoly. In a monopoly, the consumer is stuck with whatever decisions the producer makes, because there is no rival product to choose.
Oligopoly is another market structure characterized by few sellers. There are more producers than in a monopoly, but the range of businesses is very limited, and consumers have to choose from a short list of providers. Oligopoly offers some competition, but producers do not have to worry very much about competition.
At the other end of the spectrum of market structures is pure competition. In a purely competitive market, there are numerous businesses, and there is a wide variety of products sold. In a purely competitive market, consumers have a wide range of choices, and producers have to find ways to beat out their rivals. All this competition results in a lot of innovation, incentives to be efficient, and lower prices.
Pure Competition
The market structure that works best for consumers is pure competition. Pure competition is an ideal market structure that does not actually exist anywhere in the real world. We can, however, use pure competition as a standard for analyzing the market structures that do exist.
A purely competitive market has
– A large number of small businesses.
– Identical or easily substituted products.
– Freedom of entry into and exit out of the industry.
– Perfect knowledge of prices and technology.
Even though pure competition does not actually exist in the real world, there are places where it is close. The company eBay, an online retailer, created a marketplace on the Internet that functions with a market structure that comes quite close to pure competition.
Consumers can buy almost anything on eBay in a pure competition market structure. Pure competition exists when identical products are sold.
The sellers or producers on eBay set a minimum price for their goods. The consumer can then bid for the goods of his or her choosing. In this case, we have pure competition because everyone has perfect knowledge of the prices set.
Monopoly
Pure competition and monopoly are two extreme types of market structure.
While pure competition allows for perfect competition among a large number of sellers, a monopoly creates a total lack of competition. The monopoly has complete control over its market. This gives the producer complete control over what products to provide and what prices to charge.
The characteristics of a monopoly are
– A single producer.
– A unique product with no close substitutes.
– A price controlled by the producer.
– Entry is blocked to competitors.
The Near Monopoly
A pure monopoly is nearly as rare as pure competition. Most actual monopolies, such as a city’s utility provider, are heavily regulated by the government.
But there are some companies that control a particular market so thoroughly that they come close to creating a monopoly.
Microsoft is one of these near monopolies. While Microsoft is not a monopoly by definition – Apple also creates operating-system software – Microsoft dominates the market so effectively that it has been accused of acting like a monopoly.
The Microsoft Monopoly
Bill Gates and his company Microsoft control the market when it comes to operating systems, such as Windows 95, Office 2003, and other software applications.
Did you know that 90% of the world’s personal computers run on Microsoft software from the minute they are turned on? Microsoft has managed to automatically set up its operating systems in most computers being sold in the world. It has a monopoly, because its products are unique, and its rivals cannot compete against it. Microsoft is also able to control the price of its operating systems because there are no similar products on the market.
In 1998, a court case was filed against Microsoft Corporation. Microsoft rivals accused Microsoft of abusing its monopoly in the way it sold its operating systems and web browsers. The main issue was whether Microsoft was allowed to sell its Internet Explorer web browser
