Competition (economics)

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In economics, competition is a scenario where different economic firms [Note 1] are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought, competition causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater the selection of a good is in the market, prices are typically lower for the products, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly). According to Antoine Augustin Cournot, the definition of competition is the situation in which price does not vary with quantity, or in which the demand curve facing the firm is horizontal. [1] The level of competition that exists within the market is dependent on a variety of factors both on the firm/ seller side; the number of firms, barriers to entry, information, and availability/ accessibility of resources. The number of buyers within the market also factors into competition with each buyer having a willingness to pay, influencing overall demand for the product in the market.

Contents

Competitiveness [2] pertains to the ability and performance of a firm, sub-sector or country to sell and supply goods and services in a given market, in relation to the ability and performance of other firms, sub-sectors or countries in the same market. It involves one company trying to figure out how to take away market share from another company. Competitiveness is derived from the Latin word “competere”, which refers to the rivalry that is found between entities in markets and industries. It is used extensively in management discourse concerning national and international economic performance comparisons. [3]

The extent of the competition present within a particular market can measured by; the number of rivals, their similarity of size, and in particular the smaller the share of industry output possessed by the largest firm, the more vigorous competition is likely to be. [4]

Early economic research focused on the difference between price and non-price based competition, while modern economic theory has focused on the many-seller limit of general equilibrium.

Firm competition

Empirical observation confirms that resources (capital, labor, technology) and talent tend to concentrate geographically (Easterly and Levine 2002). This result reflects the fact that firms are embedded in inter-firm relationships with networks of suppliers, buyers and even competitors that help them to gain competitive advantages in the sale of its products and services. While arms-length market relationships do provide these benefits, at times there are externalities that arise from linkages among firms in a geographic area or in a specific industry (textiles, leather goods, silicon chips) that cannot be captured or fostered by markets alone. The process of "clusterization", the creation of "value chains", or "industrial districts" are models that highlight the advantages of networks.

Within capitalist economic systems, the drive of enterprises is to maintain and improve their own competitiveness, this practically pertains to business sectors.

Perfect vs imperfect competition

Perfect competition

Neoclassical economic theory places importance in a theoretical market state, in which the firms and market are considered to be in perfect competition. Perfect competition exists when all criteria are met, which is rarely (if ever) observed in the real world. These criteria include; all firms contribute insignificantly to the market, [5] all firms sell an identical product, all firms are price takers, market share has no influence on price, both buyers and sellers have complete or "perfect" information, resources are perfectly mobile and firms can enter or exit the market without cost. [6] Under perfect competition, there are many buyers and sellers within the market and prices reflect the overall supply and demand. Another key feature of a perfectly competitive market is the variation in products being sold by firms. The firms within a perfectly competitive market are small, with no larger firms controlling a significant proportion of market share. [6] These firms sell almost identical products with minimal differences or in-cases perfect substitutes to another firms product.

The idea of perfectly competitive markets draws in other neoclassical theories of the buyer and seller. The buyer in a perfectly competitive market have identical tastes and preferences with respect to desired product features and characteristics (homogeneous within industries) and also have perfect information on the goods such as price, quality and production. [7] In this type of market, buyers are utility maximizers, in which they are purchasing a product that maximizes their own individual utility that they measure through their preferences. The firm, on the other hand, is aiming to maximize profits acting under the assumption of the criteria for perfect competition.

The firm in a perfectly competitive market will operate in two economic time horizons; the short-run and long-run. In the short-run the firm adjusts its quantity produced according to prices and costs. While in the long run the firm is adjusting its methods of production to ensure they produce at a level where marginal cost equals marginal revenue. [7] In a perfectly competitive market, firms/producers earn zero economic profit in the long run. [5] This is proved by Cournot's system.

Imperfect competition

Imperfectly competitive markets are the realistic markets that exist in the economy. Imperfect competition exist when; buyers might not have the complete information on the products sold, companies sell different products and services, set their own individual prices, fight for market share and are often protected by barriers to entry and exit, making it harder for new firms to challenge them. [8] An important differentiation from perfect competition is, in markets with imperfect competition, individual buyers and sellers have the ability to influence prices and production. [9] Under these circumstances, markets move away from the neoclassical economic definition of a perfectly competitive market, as the market fails the criteria and this inevitably leads to opportunities to generate more profit, unlike in a perfect competition environment, where firms earn zero economic profit in the long run. [8] These markets are also defined by the presence of monopolies, oligopolies and externalities within the market.

The measure of competition in accordance to the theory of perfect competition can be measured by either; the extent of influence of the firm's output on price (the elasticity of demand), or the relative excess of price over marginal cost. [4]

Types of imperfect competition

Monopoly

Monopoly is the opposite to perfect competition. Where perfect competition is defined by many small firms competition for market share in the economy, Monopolies are where one firm holds the entire market share. Instead of industry or market defining the firms, monopolies are the single firm that defines and dictates the entire market. [10] Monopolies exist where one of more of the criteria fail and make it difficult for new firms to enter the market with minimal costs. Monopoly companies use high barriers to entry to prevent and discourage other firms from entering the market to ensure they continue to be the single supplier within the market. A natural monopoly is a type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. [11] These types of monopolies arise in industries that require unique raw materials, technology, or similar factors to operate. [11] Monopolies can form through both fair and unfair business tactics. These tactics include; collusion, mergers, acquisitions, and hostile takeovers. Collusion might involve two rival competitors conspiring together to gain an unfair market advantage through coordinated price fixing or increases. [11] Natural monopolies are formed through fair business practices where a firm takes advantage of an industry's high barriers. The high barriers to entry are often due to the significant amount of capital or cash needed to purchase fixed assets, which are physical assets a company needs to operate. [11] Natural monopolies are able to continue to operate as they typically can as they produce and sell at a lower cost to consumers than if there was competition in the market. Monopolies in this case use the resources efficiently in order to provide the product at a lower price. Similar to competitive firms, monopolists produces a quantity at that marginal revenue equals marginal cost. The difference here is that in a monopoly, marginal revenue does not equal to price because as a sole supplier in the market, monopolists have the freedom to set the price at which the buyers are willing to pay for to achieve profit-maximizing quantity. [12]

Oligopoly

Oligopolies are another form of imperfect competition market structures. An oligopoly is when a small number of firms collude, either explicitly or tacitly, to restrict output and/or fix prices, in order to achieve above normal market returns. [13] Oligopolies can be made up of two or more firms. Oligopoly is a market structure that is highly concentrated. Competition is well defined through the Cournot's model because, when there are infinite many firms in the market, the excess of price over marginal cost will approach to zero. [1] A duopoly is a special form of oligopoly where the market is made up of only two firms. Only a few firms dominate, for example, major airline companies like Delta and American Airlines operate with a few close competitors, but there are other smaller airlines that are competing in this industry as well. [14] Similar factors that allow monopolies to exist also facilitate the formation of oligopolies. These include; high barriers to entry, legal privilege; government outsourcing to a few companies to build public infrastructure (e.g railroads) and access to limited resources, primarily seen with natural resources within a nation. Companies in an oligopoly benefit from price-fixing, setting prices collectively, or under the direction of one firm in the bunch, rather than relying on free-market forces to do so. [13] Oligopolies can form cartels in order to restrict entry of new firms into the market and ensure they hold market share. Governments usually heavily regulate markets that are susceptible to oligopolies to ensure that consumers are not being over charged and competition remains fair within that particular market. [15]

Monopolistic competition

Monopolistic competition characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry and exit in a monopolistic competitive industry are low, and the decisions of any one firm do not directly affect those of its competitors. [16] Monopolistic competition exists in-between monopoly and perfect competition, as it combines elements of both market structures. Within monopolistic competition market structures all firms have the same, relatively low degree of market power; they are all price makers, rather than price takers. In the long run, demand is highly elastic, meaning that it is sensitive to price changes. In order to raise their prices, firms must be able to differentiate their products from their competitors in terms of quality, whether real or perceived. In the short run, economic profit is positive, but it approaches zero in the long run. Firms in monopolistic competition tend to advertise heavily because different firms need to distinguish similar products than others. [16] Examples of monopolistic competition include; restaurants, hair salons, clothing, and electronics.

Dominant firms

In several highly concentrated industries, a dominant firm serves a majority of the market. Dominant firms have a market share of 50% to over 90%, with no close rival. Similar to a monopoly market, it uses high entry barrier to prevent other firms from entering the market and competing with them. They have the ability to control pricing, to set systematic discriminatory prices, to influence innovation, and (usually) to earn rates of return well above the competitive rate of return. [15] This is similar to a monopoly, however there are other smaller firms present within the market that make up competition and restrict the ability of the dominant firm to control the entire market and choose their own prices. As there are other smaller firms present in the market, dominant firms must be careful not to raise prices too high as it will induce customers to begin to buy from firms in the fringe of small competitors. [17]

Effective competition

Effective competition exists when there are four firms with market share below 40% and flexible pricing. Low entry barriers, little collusion, and low profit rates. [15] The main goal of effective competition is to give competing firms the incentive to discover more efficient forms of production and to find out what consumers want so they are able to have specific areas to focus on. [18]

Competitive equilibrium

Competitive equilibrium is a concept in which profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices arrive at an equilibrium price. At this equilibrium price, the quantity supplied is equal to the quantity demanded. [19] This implies that a fair deal has been reached between supplier and buyer, in-which all suppliers have been matched with a buyer that is willing to purchase the exact quantity the supplier is looking to sell and therefore, the market is in equilibrium.

The competitive equilibrium in economic theory is considered to be a part of game theory which deals with decision making of firms or selection outcome [20] in large markets. The overall concept acts as a benchmark for evaluating efficiency in the market and how far off the market is from equilibrium. [19]

The competitive equilibrium has many applications for predicting both the price and total quality in a particular market. It can also be used to estimate the quantity consumed from each individual and the total output of each firm within a market. Furthermore, through the idea of a competitive equilibrium, particular government policies or events can be evaluated and decide whether they move the market towards or away from the competitive equilibrium. [19]

Role in market success

Competition is generally accepted as an essential component of markets, and results from scarcity—there is never enough to satisfy all conceivable human wants—and occurs "when people strive to meet the criteria that are being used to determine who gets what." In offering goods for exchange, buyers competitively bid to purchase specific quantities of specific goods which are available, or might be available if sellers were to choose to offer such goods. Similarly, sellers bid against other sellers in offering goods on the market, competing for the attention and exchange resources of buyers. [21] :105

The competitive process in a market economy exerts a sort of pressure that tends to move resources to where they are most needed, and to where they can be used most efficiently for the economy as a whole. For the competitive process to work however, it is "important that prices accurately signal costs and benefits." Where externalities occur, or monopolistic or oligopolistic conditions persist, or for the provision of certain goods such as public goods, the pressure of the competitive process is reduced. [22]

In any given market, the power structure will either be in favor of sellers or in favor of buyers. The former case is known as a seller's market; the latter is known as a buyer's market or consumer sovereignty. [23] In either case, the disadvantaged group is known as price-takers and the advantaged group known as price-setters. [24] Price takers must accept the prevailing price and sell their goods at the market price whereas price setters are able to influence market price and enjoy pricing power.

Competition bolsters product differentiation as businesses try to innovate and entice consumers to gain a higher market share and increase profit. It helps in improving the processes and productivity as businesses strive to perform better than competitors with limited resources. The Australian economy thrives on competition as it keeps the prices in check. [25]

Historical views

In his 1776 The Wealth of Nations , Adam Smith described it as the exercise of allocating productive resources to their most highly valued uses and encouraging efficiency, an explanation that quickly found support among liberal economists opposing the monopolistic practices of mercantilism, the dominant economic philosophy of the time. [26] [27] Smith and other classical economists before Cournot were referring to price and non-price rivalry among producers to sell their goods on best terms by bidding of buyers, not necessarily to a large number of sellers nor to a market in final equilibrium. [28]

Later microeconomic theory distinguished between perfect competition and imperfect competition, concluding that perfect competition is Pareto efficient while imperfect competition is not. Conversely, by Edgeworth's limit theorem, the addition of more firms to an imperfect market will cause the market to tend towards Pareto efficiency. [29] Pareto efficiency, named after the Italian economist and political scientist Vilfredo Pareto (1848-1923), is an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off. It implies that resources are allocated in the most economically efficient manner, however, it does not imply equality or fairness.

Appearance in real markets

Real markets are never perfect. Economists who believe that perfect competition is a useful approximation to real markets classify markets as ranging from close-to-perfect to very imperfect. Examples of close-to-perfect markets typically include share and foreign exchange markets while the real estate market is typically an example of a very imperfect market. In such markets, the theory of the second best proves that, even if one optimality condition in an economic model cannot be satisfied, the next-best solution can be achieved by changing other variables away from otherwise-optimal values. [30] :217

Time variation

Within competitive markets, markets are often defined by their sub-sectors, such as the "short term" / "long term", "seasonal" / "summer", or "broad" / "remainder" market. For example, in otherwise competitive market economies, a large majority of the commercial exchanges may be competitively determined by long-term contracts and therefore long-term clearing prices. In such a scenario, a “remainder market” is one where prices are determined by the small part of the market that deals with the availability of goods not cleared via long term transactions. For example, in the sugar industry, about 94-95% of the market clearing price is determined by long-term supply and purchase contracts. The balance of the market (and world sugar prices) are determined by the ad hoc demand for the remainder; quoted prices in the "remainder market" can be significantly higher or lower than the long-term market clearing price.[ citation needed ] Similarly, in the US real estate housing market, appraisal prices can be determined by both short-term or long-term characteristics, depending on short-term supply and demand factors. This can result in large price variations for a property at one location.[ citation needed ]

Anti-competitive pressures and practices

Competition requires the existing of multiple firms, so it duplicates fixed costs. In a small number of goods and services, the resulting cost structure means that producing enough firms to effect competition may itself be inefficient. These situations are known as natural monopolies and are usually publicly provided or tightly regulated. [31]

International competition also differentially affects sectors of national economies. In order to protect political supporters, governments may introduce protectionist measures such as tariffs to reduce competition. [32]

Anti-competitive practices

A practice is anti-competitive if it unfairly distorts free and effective competition in the marketplace. Examples include cartelization and evergreening. [33]

National competition

Economic competition between countries (nations, states) as a political-economic concept emerged in trade and policy discussions in the last decades of the 20th century. Competition theory posits that while protectionist measures may provide short-term remedies to economic problems caused by imports, firms and nations must adapt their production processes in the long term to produce the best products at the lowest price. In this way, even without protectionism, their manufactured goods are able to compete successfully against foreign products both in domestic markets and in foreign markets. Competition emphasizes the use of comparative advantage to decrease trade deficits by exporting larger quantities of goods that a particular nation excels at producing, while simultaneously importing minimal amounts of goods that are relatively difficult or expensive to manufacture. Commercial policy can be used to establish unilaterally and multilaterally negotiated rule of law agreements protecting fair and open global markets. While commercial policy is important to the economic success of nations, competitiveness embodies the need to address all aspects affecting the production of goods that will be successful in the global market, including but not limited to managerial decision making, labor, capital, and transportation costs, reinvestment decisions, the acquisition and availability of human capital, export promotion and financing, and increasing labor productivity.

Competition results from a comprehensive policy that both maintains a favorable global trading environment for producers and domestically encourages firms to work for lower production costs while increasing the quality of output so that they are able to capitalize on favorable trading environments. [34] These incentives include export promotion efforts and export financing—including financing programs that allow small and medium-sized companies to finance the capital costs of exporting goods. [35] In addition, trading on the global scale increases the robustness of American industry by preparing firms to deal with unexpected changes in the domestic and global economic environments, as well as changes within the industry caused by accelerated technological advancements According to economist Michael Porter, "A nation's competitiveness depends on the capacity of its industry to innovate and upgrade." [36]

History of competition

Advocates for policies that focus on increasing competition argue that enacting only protectionist measures can cause atrophy of domestic industry by insulating them from global forces. They further argue that protectionism is often a temporary fix to larger, underlying problems: the declining efficiency and quality of domestic manufacturing. American competition advocacy began to gain significant traction in Washington policy debates in the late 1970s and early 1980s as a result of increasing pressure on the United States Congress to introduce and pass legislation increasing tariffs and quotas in several large import-sensitive industries. High level trade officials, including commissioners at the U.S. International Trade Commission, pointed out the gaps in legislative and legal mechanisms in place to resolve issues of import competition and relief. They advocated policies for the adjustment of American industries and workers impacted by globalization and not simple reliance on protection. [37]

1980s

As global trade expanded after the early 1980s recession, some American industries, such as the steel and automobile sectors, which had long thrived in a large domestic market, were increasingly exposed to foreign competition. Specialization, lower wages, and lower energy costs allowed developing nations entering the global market to export high quantities of low cost goods to the United States. Simultaneously, domestic anti-inflationary measures (e.g. higher interest rates set by the Federal Reserve) led to a 65% increase in the exchange value of the US dollar in the early 1980s. The stronger dollar acted in effect as an equal percent tax on American exports and equal percent subsidy on foreign imports. [38] American producers, particularly manufacturers, struggled to compete both overseas and in the US marketplace, prompting calls for new legislation to protect domestic industries. [39] In addition, the recession of 1979-82 did not exhibit the traits of a typical recessionary cycle of imports, where imports temporarily decline during a downturn and return to normal during recovery. Due to the high dollar exchange rate, importers still found a favorable market in the United States despite the recession. As a result, imports continued to increase in the recessionary period and further increased in the recovery period, leading to an all-time high trade deficit and import penetration rate. The high dollar exchange rate in combination with high interest rates also created an influx of foreign capital flows to the United States and decreased investment opportunities for American businesses and individuals. [38]

The manufacturing sector was most heavily impacted by the high dollar value. In 1984, the manufacturing sector faced import penetration rates of 25%. [40] The "super dollar" resulted in unusually high imports of manufactured goods at suppressed prices. The U.S. steel industry faced a combination of challenges from increasing technology, a sudden collapse of markets due to high interest rates, the displacement of large integrated producers, increasingly uncompetitive cost structure due to increasing wages and reliance on expensive raw materials, and increasing government regulations around environmental costs and taxes. Added to these pressures was the import injury inflicted by low cost, sometimes more efficient foreign producers, whose prices were further suppressed in the American market by the high dollar.

The Trade and Tariff Act of 1984 developed new provisions for adjustment assistance, or assistance for industries that are damaged by a combination of imports and a changing industry environment. It maintained that as a requirement for receiving relief, the steel industry would be required to implement measures to overcome other factors and adjust to a changing market. [41] The act built on the provisions of the Trade Act of 1974 and worked to expand, rather than limit, world trade as a means to improve the American economy. Not only did this act give the President greater authority in giving protections to the steel industry, it also granted the President the authority to liberalize trade with developing economies through Free Trade Agreements (FTAs) while extending the Generalized System of Preferences. The Act also made significant updates to the remedies and processes for settling domestic trade disputes. [42]

The injury caused by imports strengthened by the high dollar value resulted in job loss in the manufacturing sector, lower living standards, which put pressure on Congress and the Reagan Administration to implement protectionist measures. At the same time, these conditions catalyzed a broader debate around the measures necessary to develop domestic resources and to advance US competition. These measures include increasing investment in innovative technology, development of human capital through worker education and training, and reducing costs of energy and other production inputs. Competitiveness is an effort to examine all the forces needed to build up the strength of a nation's industries to compete with imports. [43]

In 1988, the Omnibus Foreign Trade and Competitiveness Act was passed. The Act's underlying goal was to bolster America's ability to compete in the world marketplace. It incorporated language on the need to address sources of American competition and to add new provisions for imposing import protection. The Act took into account U.S. import and export policy and proposed to provide industries more effective import relief and new tools to pry open foreign markets for American business. [44] Section 201 of the Trade Act of 1974 had provided for investigations into industries that had been substantially damaged by imports. These investigations, conducted by the USITC, resulted in a series of recommendations to the President to implement protection for each industry. Protection was only offered to industries where it was found that imports were the most important cause of injury over other sources of injury. [45]

Section 301 of the Omnibus Foreign Trade and Competitiveness Act of 1988 contained provisions for the United States to ensure fair trade by responding to violations of trade agreements and unreasonable or unjustifiable trade-hindering activities by foreign governments. A sub-provision of Section 301 focused on ensuring intellectual property rights by identifying countries that deny protection and enforcement of these rights, and subjecting them to investigations under the broader Section 301 provisions. [46] Expanding U.S. access to foreign markets and shielding domestic markets reflected an increased interest in the broader concept of competition for American producers. [47] The Omnibus amendment, originally introduced by Rep. Dick Gephardt, was signed into effect by President Reagan in 1988 and renewed by President Bill Clinton in 1994 and 1999. [48]

1990s

While competition policy began to gain traction in the 1980s, in the 1990s it became a concrete consideration in policy making, culminating in President Clinton's economic and trade agendas. The Omnibus Foreign Trade and Competitiveness Policy expired in 1991; Clinton renewed it in 1994, representing a renewal of focus on a competitiveness-based trade policy.

According to the Competitiveness Policy Council Sub-council on Trade Policy, published in 1993, the main recommendation for the incoming Clinton Administration was to make all aspects of competition a national priority. This recommendation involved many objectives, including using trade policy to create open and fair global markets for US exporters through free trade agreements and macroeconomic policy coordination, creating and executing a comprehensive domestic growth strategy between government agencies, promoting an "export mentality", removing export disincentives, and undertaking export financing and promotion efforts.

The Trade Sub-council also made recommendations to incorporate competition policy into trade policy for maximum effectiveness, stating "trade policy alone cannot ensure US competitiveness". Rather, the sub-council asserted trade policy must be part of an overall strategy demonstrating a commitment at all policy levels to guarantee our future economic prosperity. [34] The Sub-council argued that even if there were open markets and domestic incentives to export, US producers would still not succeed if their goods could not compete against foreign products both globally and domestically.

In 1994, the General Agreement on Tariffs and Trade (GATT) became the World Trade Organization (WTO), formally creating a platform to settle unfair trade practice disputes and a global judiciary system to address violations and enforce trade agreements. Creation of the WTO strengthened the international dispute settlement system that had operated in the preceding multilateral GATT mechanism. That year, 1994, also saw the installment of the North American Free Trade Agreement (NAFTA), which opened markets across the United States, Canada, and Mexico. [49]

In recent years, the concept of competition has emerged as a new paradigm in economic development. Competition captures the awareness of both the limitations and challenges posed by global competition, at a time when effective government action is constrained by budgetary constraints and the private sector faces significant barriers to competing in domestic and international markets. The Global Competitiveness Report of the World Economic Forum defines competitiveness as "the set of institutions, policies, and factors that determine the level of productivity of a country". [50]

The term is also used to refer in a broader sense to the economic competition of countries, regions or cities. Recently, countries are increasingly looking at their competition on global markets. Ireland (1997), Saudi Arabia (2000), Greece (2003), Croatia (2004), Bahrain (2005), the Philippines (2006), Guyana, the Dominican Republic and Spain (2011) [51] are just some examples of countries that have advisory bodies or special government agencies that tackle competition issues. Even regions or cities, such as Dubai or the Basque Country(Spain), are considering the establishment of such a body.

The institutional model applied in the case of National Competitiveness Programs (NCP) varies from country to country, however, there are some common features. The leadership structure of NCPs relies on strong support from the highest level of political authority. High-level support provides credibility with the appropriate actors in the private sector. Usually, the council or governing body will have a designated public sector leader (president, vice-president or minister) and a co-president drawn from the private sector. Notwithstanding the public sector's role in strategy formulation, oversight, and implementation, national competition programs should have strong, dynamic leadership from the private sector at all levels – national, local and firm. From the outset, the program must provide a clear diagnostic of the problems facing the economy and a compelling vision that appeals to a broad set of actors who are willing to seek change and implement an outward-oriented growth strategy. Finally, most programs share a common view on the importance of networks of firms or "clusters" as an organizing principal for collective action. Based on a bottom-up approach, programs that support the association among private business leadership, civil society organizations, public institutions and political leadership can better identify barriers to competition develop joint-decisions on strategic policies and investments; and yield better results in implementation.

National competition is said to be particularly important for small open economies, which rely on trade, and typically foreign direct investment, to provide the scale necessary for productivity increases to drive increases in living standards. The Irish National Competitiveness Council uses a Competitiveness Pyramid structure to simplify the factors that affect national competition. It distinguishes in particular between policy inputs in relation to the business environment, the physical infrastructure and the knowledge infrastructure and the essential conditions of competitiveness that good policy inputs create, including business performance metrics, productivity, labour supply and prices/costs for business.

Competition is important for any economy that must rely on international trade to balance import of energy and raw materials. The European Union (EU) has enshrined industrial research and technological development (R&D) in her Treaty in order to become more competitive. In 2009, €12 billion of the EU budget [52] (totalling €133.8 billion) will go on projects to boost Europe's competition. The way for the EU to face competition is to invest in education, research, innovation and technological infrastructures. [53] [54]

The International Economic Development Council (IEDC) [55] in Washington, D.C. published the "Innovation Agenda: A Policy Statement on American Competitiveness". This paper summarizes the ideas expressed at the 2007 IEDC Federal Forum and provides policy recommendations for both economic developers and federal policy makers that aim to ensure America remains globally competitive in light of current domestic and international challenges. [56]

International comparisons of national competition are conducted by the World Economic Forum, in its Global Competitiveness Report, and the Institute for Management Development, [57] in its World Competitiveness Yearbook. [58]

Scholarly analyses of national competition have largely been qualitatively descriptive. [59] Systematic efforts by academics to define meaningfully and to quantitatively analyze national competitiveness have been made, [60] with the determinants of national competitiveness econometrically modeled. [61]

A US government sponsored program under the Reagan administration called Project Socrates, was initiated to, 1) determine why US competition was declining, 2) create a solution to restore US competition. The Socrates Team headed by Michael Sekora, a physicist, built an all-source intelligence system to research all competition of mankind from the beginning of time. The research resulted in ten findings which served as the framework for the "Socrates Competitive Strategy System". Among the ten finding on competition was that 'the source of all competitive advantage is the ability to access and utilize technology to satisfy one or more customer needs better than competitors, where technology is defined as any use of science to achieve a function". [62]

Role of infrastructure investments

Some development economists believe that a sizable part of Western Europe has now fallen behind the most dynamic amongst Asia's emerging nations, notably because the latter adopted policies more propitious to long-term investments: "Successful countries such as Singapore, Indonesia and South Korea still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997–1998 'Asian Crisis' […] What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the "Washington consensus" [the dominant Neoclassical perspective] by investing massively in infrastructure projects […] this pragmatic approach proved to be very successful." [63]

The relative advancement of a nation's transportation infrastructure can be measured using indices such as the (Modified) Rail Transportation Infrastructure Index (M-RTI or simply 'RTI') combining cost-efficiency and average speed metrics [64]

While competition is understood at a macro-scale, as a measure of a country's advantage or disadvantage in selling its products in international markets. Trade competition can be defined as the ability of a firm, industry, city, state or country, to export more in value added terms than it imports.

Using a simple concept to measure heights that firms can climb may help improve execution of strategies. International competition can be measured on several criteria but few are as flexible and versatile to be applied across levels as Trade Competitiveness Index (TCI). [65]

TCI can be formulated as ratio of forex (FX) balance to total forex as given in equation below. It can be used as a proxy to determine health of foreign trade, The ratio goes from 1 to +1; higher ratio being indicative of higher international trade competitiveness.

${\displaystyle TCI={\frac {{\textrm {FXEarnings}}-{\textrm {FXExpenses}}}{{\textrm {FXEarnings}}+{\textrm {FXExpenses}}}}}$

In order to identify exceptional firms, trends in TCI can be assessed longitudinally for each company and country. The simple concept of trade competitiveness index (TCI) can be a powerful tool for setting targets, detecting patterns and can also help with diagnosing causes across levels. Used judiciously in conjunction with the volume of exports, TCI can give quick views of trends, benchmarks and potential. Though there is found to be a positive correlation between the profits and forex earnings, we cannot blindly conclude the increase in the profits is due to the increase in the forex earnings. The TCI is an effective criteria, but need to be complemented with other criteria to have better inferences.

Excessive competition

Excessive competition is a competition that supply is excessive to demand chronically, and it harm the producer on the interest. [66] Excessive competition is also caused when supply of goods or service which should be sell immediately is excessive to demand. So on labor market, the labor will be left always into the excessive competition. [67]

Criticism

Critiques of perfect competition

Economists do not all agree to the practicability of perfect competition. There is debate surrounding how relevant it is to real world markets and whether it should be a market structure that should be used as a benchmark.

Neoclassical economists believe that perfect competition creates a perfect market structure, with the best possible economic outcomes for both consumers and society. In general, they do not claim that this model is representative of the real world. Neoclassical economists argue that perfect competition can be useful, and most of their analysis stems from its principles. [68]

Economists that are critical of the neoclassical reliance on perfect competition in their economic analysis believe that the assumptions built into the model are so unrealistic that the model cannot produce any meaningful insights. The second line of critic to perfect competition is the argument that it is not even a desirable theoretical outcome. [68] These economists believe that the criteria and outcomes of perfect competition do not achieve a efficient equilibrium in the market and other market structures are better used as a benchmark within the economy.

Krugman (1994) points to the ways in which calls for greater national competition frequently mask intellectual confusion arguing that, in the context of countries, productivity is what matters and "the world's leading nations are not, to any important degree, in economic competition with each other." Krugman warns that thinking in terms of competition could lead to wasteful spending, protectionism, trade wars, and bad policy. [69] As Krugman puts it in his crisp, aggressive style "So if you hear someone say something along the lines of 'America needs higher productivity so that it can compete in today's global economy', never mind who he is, or how plausible he sounds. He might as well be wearing a flashing neon sign that reads: 'I don't know what I'm talking about'."

If the concept of national competition has any substantive meaning it must reside in the factors about a nation that facilitates productivity and alongside criticism of nebulous and erroneous conceptions of national competition systematic and rigorous attempts like Thompson's [60] need to be elaborated.[ dubious ][ clarification needed ]

Notes

1. This article follows the general economic convention of referring to all actors as firms; examples in include individuals and brands or divisions within the same (legal) firm.

Related Research Articles

Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as whole, which is studied in macroeconomics.

A monopoly is as described by Irving Fischer, a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. If this happens in the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition. Further work on monopolistic competition was undertaken by Dixit and Stiglitz who created the Dixit-Stiglitz model which has proved applicable used in the sub fields of international trade theory, macroeconomics and economic geography.

An oligopoly is a market form wherein a market or industry is dominated by a small group of large sellers (oligopolists). For example, it has been found that insulin and the electrical industry are highly oligopolist in the US.

In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models where conditions of perfect competition hold, it has been demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium would be a Pareto optimum.

In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market, resulting in market failure.

In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the values of economic variables will not change. For example, in the standard text perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal. Market equilibrium in this case is a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes, and quantity is called the "competitive quantity" or market clearing quantity. But the concept of equilibrium in economics also applies to imperfectly competitive markets, where it takes the form of a Nash equilibrium.

In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power.

In economics, a monopoly is a firm that lacks any viable competition, and is the sole producer of the industry's product. In a normal competitive situation, no firm can charge a price that is significantly higher than the marginal (economic) cost of producing the product. If any firm doing business within a competitive situation tries to raise prices significantly higher than the marginal cost of producing the product, it will lose all of its customers to either other existing firms that charge lower prices, or to a new firm that will find it profitable to use a lower price to take customers away from the firm charging the higher price. But since the monopoly firm does not have to worry about losing customers to competitors, it can set a monopoly price that is significantly higher than its marginal cost, allowing it to have an economic profit that is significantly higher than the normal profit that is typically found in a perfectly competitive industry. The high economic profit obtained by a monopoly firm is referred to as monopoly profit.

In microeconomics, two goods are substitutes if the products could be used for the same purpose by the consumers. That is, a consumer perceives both goods as similar or comparable, so that having more of one good causes the consumer to desire less of the other good. Contrary to complementary goods and independent goods, substitute goods may replace each other in use due to changing economic conditions. An example of substitute goods is Coca-Cola and Pepsi; the interchangeable aspect of these goods is due to the similarity of the purpose they serve, i.e fulfilling customers' desire for a soft drink. These types of substitutes can be referred to as close substitutes.

In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing sales. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.

Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship". It often occurs in imperfectly competitive markets because it exists between two or more producers that sell goods and services at the same prices but compete to increase their respective market shares through non-price measures such as marketing schemes and greater quality. It is a form of competition that requires firms to focus on product differentiation instead of pricing strategies among competitors. Such differentiation measures allowing for firms to distinguish themselves, and their products from competitors, may include, offering superb quality of service, extensive distribution, customer focus, or any sustainable competitive advantage other than price. When price controls are not present, the set of competitive equilibria naturally correspond to the state of natural outcomes in Hatfield and Milgrom's two-sided matching with contracts model.

Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it easier to understand the characteristics of diverse markets.

A market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services to buyers in exchange for money. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and resource allocation in a society. Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale.

In economics, partial equilibrium is a condition of economic equilibrium which analyzes only a single market, ceteris paribus except for the one change at a time being analyzed. In general equilibrium analysis, on the other hand, the prices and quantities of all markets in the economy are considered simultaneously, including feedback effects from one to another, though the assumption of ceteris paribus is maintained with respect to such things as constancy of tastes and technology.

Edward Hastings Chamberlin was an American economist. He was born in La Conner, Washington, and died in Cambridge, Massachusetts.

In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and the ownership of private property. A distortion is "any departure from the ideal of perfect competition that therefore interferes with economic agents maximizing social welfare when they maximize their own". A proportional wage-income tax, for instance, is distortionary, whereas a lump-sum tax is not. In a competitive equilibrium, a proportional wage income tax discourages work.

An economic profit is the difference between the revenue a commercial entity has received from its outputs and the opportunity costs of its inputs. Unlike an accounting profit, an economic profit takes into account both a firm's implicit and explicit costs, whereas an accounting profit only relates to the explicit costs which appear on a firm's financial statements. Because it includes additional implicit costs, the economic profit usually differs from the accounting profit.

The following outline is provided as an overview of and topical guide to economics:

In microeconomics, the Bertrand–Edgeworth model of price-setting oligopoly looks at what happens when there is a homogeneous product where there is a limit to the output of firms which are willing and able to sell at a particular price. This differs from the Bertrand competition model where it is assumed that firms are willing and able to meet all demand. The limit to output can be considered as a physical capacity constraint which is the same at all prices, or to vary with price under other assumptions.

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