Meaning of Competition? Competition as the force that compels the owners of resources to do the bidding of consumers. We turn now to a study of how this result is obtained. In this study we shall examine the operation of the entire signal system of an enterprise economy. We shall begin with an examination of how the signal system works when all economic activities are subjected to the discipline of competition. Later we shall examine the changes in the operation of the economy that arise when competitive pressures are weakened or eliminated. lets discuss in detail meaning of competition;
MEANING OF COMPETITION
Competition is one of the most elusive, yet one of the most important, concepts in economics. Even the professional economist has not been able to draw a sharp dividing line between competitive and noncompetitive behavior. It is not surprising then that Congress and the courts have found it difficult to define and enforce competitive conditions. Instead of black and white, these groups have been confronted with various shades of gray. The very light shades are clearly competitive; the very dark shades, clearly noncompetitive. But what of the shadings in between? Let us examine the various ways in which the economist approaches this problem.
Markets. Before attempting a definition of competition we would do well to recall the areas in economic life which the competitive discipline is supposed to govern. we indicated that competition is supposed to discipline men in all of their buying and selling activities. In other words, it is the market in which goods and services are bought and sold that we must turn our attention when we study competition.
Each household and each firm operates in many markets, sometimes as buyer, sometimes as seller. Each household is a buying unit when it is acquiring the food, clothing, and other goods and services used in the household. It is a selling unit when it offers its labor, its land or other natural resources, or its capital in the markets for resources. Each firm is a buying unit when it is acquiring the resources the labor, land, capital, and managerial talent—which it uses to produce goods and services. It is a selling unit when it offers those goods and services for sale.
It is clear from this that each market is a two-sided affair, involving both buyers and sellers. It follows that for a market to be fully competitive there must be competition on both sides. That is, buyers must compete with buyers and sellers with sellers.
For example, in a competitive labor market, workers will be competing for the available jobs, and employers will be competing for the available labor. It is a mistake to associate competition and its opposite, monopoly, only with the behavior of business firms as sellers of goods. It should be clear from our discussion that the behavior on either side of a market, whether it be a market for goods or a market for resources, can be classified as competitive or noncompetitive.
The results of competition. Still delaying a definition of competition, let us describe in general terms the results of competitive action. Competition results in a situation in which each individual can advance his own interest only by advancing the interests of others. Under competition, the owners of a business firm can increase their own incomes only by giving the customers of the firm more for their dollars. Under competition, workers can increase their own incomes only by making bigger contributions to the satisfaction of consumer wants.
VARIOUS DEFINITION OF COMPETITION
A definition of competition in terms of results. This leads the way to a definition of competition in terms of results. Competition can be said to exist in a given market whenever each buyer and each seller in that market can improve his own economic position only by offering more for less. This is approximately the same definition as the one used in Chapter 3. It might be called a performance test for determining the existence of competition.
We shall make considerable use of this definition, but we must recognize its limitations. The most serious limitation of this definition is that the results of market behavior are not easy to assess. Reliable quantitative evidence showing that more is being offered for less in any given situation is often difficult if not impossible to obtain. For this reason, economists have usually defined competition not in terms of results but rather in terms of the organization of the market which they believe is necessary to produce competitive results. This approach provides us with an organization test for determining the existence of competition.
Definitions of competition in terms of market organization and behavior. The average person has a rough perception of the features of a market which tend to make it competitive or noncompetitive. He is uneasy whenever he finds that there is only one source of something he wants to buy or one buyer for something he wants to sell. He is uneasy whenever he lacks the technical knowledge to appraise what he is buying or selling. He is deeply disturbed to find that union rules or racial prejudice or some other factor prevents him from moving into a particular kind of work. He is suspicious of an arrangement under which the firms selling or buying some product seem to be “working together,” rather than acting independently.
“Ideal” competition. These same factors are recognized in the economist’s classification of markets. We shall present first a very demanding definition of competition, which we shall always refer to hereafter as “ideal” competition. The requirements of “ideal” competition are as follows:
(1) Each buying unit and each selling unit must be so small relative to the total market that by its own activities it can have no perceptible influence on the market price. This is illustrated in the
selling of wheat in the United States. If one American wheat farmer were to hold his wheat off the market, what would happen to the price of wheat? The answer: Nothing.
(2) Each unit of the goods or services sold must be a perfect substitute for each other unit. This often requires more than that the units be technically identical. Because of personal or locational factors, a tube of a certain toothpaste sold in one store may not be the same to a consumer as another tube of the same size and brand sold in another store. Pure competition requires that there be no preference for one seller or buyer over another on any basis other than price.
(3) Each person involved in the market must have full knowledge of the alternatives confronting him.
(4) Each economic unit must be perfectly willing and able to act on the basis of that knowledge, to move from one alternative to another. This is often referred to as the requirement of mobility.
(5) Each economic unit must be acting independently. That is, there must be no collusion among buyers against sellers or among sellers against buyers.
The significance of “Ideal” competition. It is obvious that many of the foregoing requirements can never be realized in economic life. Of what use then is the definition? Admittedly it is of little direct use in analyzing the actual behavior of our economy or as a guide to public policy. However, it can contribute indirectly to both these purposes. It provides the economist with an analytical tool of considerable importance. It can be used as a bench-mark against which to measure degrees and forms of deviations from “ideal” conditions. Also it focuses attention on those aspects of market organization and behavior which determine the way in which a market operates. Those aspects are:
(1) the size of the economic unit relative to the market;
(2) the degree of homogeneity of the items being exchanged;
(3) the degree to which the participants are acting on the basis of knowledge;
(4) the degree of mobility of the participants;
(5) the degree to which the participants are acting independently.
These characteristics are the ones used in classifying actual markets in an enterprise economy. As we shall see, they are the keys to an understanding of both competitive and noncompetitive behavior.
Pure competition. By relaxing the requirements of “ideal” competition, it is possible to construct one which is more realistic, more directly useful, yet still of value as a tool of analysis. The modified definition is as follows:
(1) Each buyer and each seller, acting alone, can exert so little influence on the market price that it does not pay him to attempt to do so.
(2) Each unit of the good or service sold is so much like every other unit that buyers and sellers will react to any but very small differences in price.
(3) Enough buyers are possessed of sufficient knowledge of the alternatives to keep the sellers in line, and vice versa.
(4) Enough buyers are sufficiently willing and able to move from one alternative to another to keep the sellers in line, and vice versa.
(5) Just as before, each buyer and each seller acts independently.
The advantages of this over the first definition of competition will be made clear as we proceed with our study of an enterprise system. In the future we shall distinguish between the two by calling this one “pure competition,” and both will be distinguished in a later chapter from a still less exacting concept which will be referred to as “effective competition” or “workable competition.”
Whenever one or more of the preceding conditions is missing in the market for a particular good, that market is technically a noncompetitive market. However, we shall find that certain market forms which do not meet the technical requirements for pure competition are as efficient in yielding consumer satisfactions as those which do—in some cases, even more efficient! It is in connection with such market situations that we shall use the terms “effective competition” and “workable competition.” In view of the fact that there are many types of markets, ranging from purely competitive to completely monopolistic, it is evident that the terms “competitive” and “noncompetitive” are only roughly descriptive and are not synonymous with “good” and “bad.”
Deviations from purely competitive markets. The following deviations from technically competitive conditions are as follow:
(1) Monopolistic competition describes a market situation in which all of the requirements for pure competition are met but the requirement of standardized product. The distinguishing characteristic of this type of market is product differentiation.
(2) Oligopoly describes a market situation in which each seller is large enough relative to the market to be able to exert a significant influence on the market price. It is characterized by fewness of sellers and difficult entry into the market. Duopoly is a form of oligopoly in which but two sellers operate in the market.
(3) Monopoly is a situation in which only one supplier operates in the market.
(4) Cartel is a market situation in which the sellers of the good or service make joint rather than independent decisions about price, output, and other policies. Collusion is a form of behavior that may be found in any of the market situations described above.
These four definitions were expressed in terms of the activities of sellers. When buyers rather than sellers are involved, we shall follow established practice and use the designations monapsonistic competition, oligopsony, duopsony and monopsony. Cartel is used to describe collusive action on either side of the market.