Is Competition a Process or a Market Structure?
Before we answer this question, it is necessary to understand what competition means in economics and what market structures are. Competition, according to Dr. Samuel Johnson, is the
“ act of endeavoring to gain what another endeavors to gain at the same time.’’
This means that in the market, firms that are selling the same, or similar products, usually try to gain as much of a market share as they can at the same time, to maximise their profits- which is the primary reason for a firm to enter the market. A market is a place where buyers and sellers can exchange goods and services. To understand these markets and how they function, market structures were introduced. There are multiple market structures, such as Monopoly, Oligopoly and Monopolistic Competition, each having its own assumptions, which make it easier to understand various industries in the world today.
Having understood the given terminologies, I believe that competition is a process. By observing how markets can be influenced by this process, market structures are formed by simplifying our observations in the real world.
Perfect competition is often said to be the ‘ideal’ scenario. Perfect competition is when a large number of firms show maximum competition, or is the market structure in which we can see the concept of competition at its purest form, among all of the market structures. The assumptions for perfect competition are:-
- There are a large number of buyers and sellers
- There is no product differentiation, which means that all of the products will not have any minor variations to differentiate themselves from similar products available in the market. For example, all of the mobile phones available in the market under this assumption will be the same.
- The sellers are the price takers, i.e. they will sell their products at whatever price is determined in the market, they cannot set their own price.
- free entry and exit in the market
- Everyone participating in the market has perfect information, or in simple words, everyone has all the information regarding what is going on in the market, whether it is a buyer or a seller.
To begin with, every firm in a perfectly competitive market ends up being price takers, because if they set their own price, they will lose their buyers. This assumption has only come by understanding how the market has been formed. For example, if one seller would start with a new product, and at that point he can set the price. The moment other potential sellers realise that there is a large scope to make profit, they will enter the market- and try to sell the same product at a lower price, as to gain market share, so that their profit would increase. The first seller would then reduce their price to match the market price, lest they lose market share.This would continue, with more sellers entering the market, and the market price getting lowered, till it reaches a point where the sellers are just covering their economic costs, hence reaching an equilibrium.
For this to happen in the real world, the product will have to be sold with no restrictions, and with sufficient demand. In the real world every seller’s costs will most likely differ, as each one isn’t guaranteed to have the same skills. Research and development may be carried out to reduce the costs as well. The equilibrium which is thus attained is for the short run. As for the long run, the equilibrium is going to be dynamic in nature and will keep changing over time as multiple variables affect it.
Another issue here is that you can never have complete information about the market. You can get the maximum amount of information possible only by undergoing the process of competing with other firms as sellers- and even then, you may not know what the other firms are thinking to do at any given moment. As for the buyers, various methods of marketing and advertising help in understanding what is available, but they only see what the firms want them to see. The market structure also does not take personal bias into account. We tend to have a personal bias towards a particular seller, which develops as we try different sellers in the market and finally settle for one who we feel serves the best product/service according to our requirement. Even homogenous products never truly exist, there always are usually some small differences between the products or services between two sellers- such as different styles for shirts sold, or in the case of the farmer’s markets, some sellers tend to sell better quality vegetables and so on.
Branding and undercutting are some of the prominent ways to compete in the market, but they are not accounted for in perfect competition. All of these contradictions can be attributed due to the process of competition, and while perfect competition may be the ideal scenario and helps in the study of competition, this market structure, like others, comes from observations and simplification of the real world industries. Hence, competition isn’t a market structure in itself, it is a process
- Hayek, F. A. (1996). Individualism and Economic Order (Reissue ed.). University of Chicago Press.