Competition describes the interaction between sellers in markets, as each party tries to increase their own profits and market share. Sellers will alter price, distribution, advertising, and product in order to beat out the other sellers and obtain their goals. Competition forces firms to create new products or services, or improve their existing ones.
Competition has been separated into perfect competition and imperfect competition. Perfect competition is when a market does not have a firm that has the power to be a price setter and imperfect competition is where firms are able to gain some market power.
Economic competition can be defined as one of three types. The first is direct competition, which is when a product has the same function as another, making the two products each other’s competitor. The second is substitute competition, when a product and its substitute are in competition with each other. The third form of competition is budget competition, which is the broadest of the three because a product is in competition with anything a consumer will spend money on. Competition does not always exist between firms because a company can have internal competition between two of its own products.
In a monopoly, competition does not exist, most often because of some sort of government production that inhibits other firms from entering the market.
Competition is an important element in economics because it regulates market activity and also maintains or increases quality and utility of product and services.© BrainMass Inc. brainmass.com January 18, 2021, 10:49 am ad1c9bdddf