Competition

Competition, in economics, conditions that are present in markets where buyers and sellers interact to establish prices and exchange goods and services. Economic competition is the means whereby the self-interest of buyers and sellers acts to serve the needs of society as well as those of individual market participants. Society is served when the maximum number of goods is produced at the lowest possible prices.

Perfect Competition

The theoretical ideal developed by economists to establish the conditions under which competition would achieve maximum effectiveness is known as “perfect” competition. Although rarely possible, perfect competition, as a concept, provides a useful benchmark for evaluating performance in actual markets.

Perfect competition requires that the following five parameters be fulfilled.

1. Atomicity An atomistic market is one in which there are a large number of small producers and consumers on a given market, each so small that its actions have no significant impact on others. Firms are price takers, meaning that the market sets the price that they must choose.

2. Homogeneity Goods and services are perfect substitutes; that is, there is no product differentiation.

3. Perfect and complete information All firms and consumers know the prices set by all firms.

4. Equal access All firms have access to production technologies, and resources (including information) are perfectly mobile.

5. Free entry Any firm may enter or exit the market as it wishes.

Workable Competition

The absence of perfect competition in most markets led to a search for a more realistic alternative to evaluate performance in specific instances. Among the best-known alternatives is the concept of “workable” competition, developed by the American economist John M. Clark in 1940. Clark recognized that in most industries the number of business firms is not so great as to preclude an individual firm from having some power to influence market prices and conditions. In addition, participants rarely have complete knowledge of market conditions. According to Clark, however, departures from the ideal of perfect competition often are not great enough to warrant government intervention into the market (through antitrust action or direct regulation) in order to improve the situation. Competition may be workable in the sense that the results achieved are roughly comparable to what is supposed to happen under the theoretical ideal of perfect competition. The chief drawback to the workable-competition concept is its vagueness; no precise criteria have been developed to determine when workable competition actually exists.