Posted in Finance, Accounting and Economics Terms, Total Reads: 682
Competition is defined as the practice in which a firm tries to move ahead of others, selling comparable products or services, in terms of profit, revenue, market share etc. through the best possible combination of price, quality and services.
Thus a competition is said to exist when products or services can be substituted with products or services at least one other firm.
Factors that contribute to the existence of competition:
Lack of Entry Barriers: allows several new players to enter an existing market resulting in further divisions in market share
New Technologies: Invention of more efficient processes and product innovations lead to replacement of existing processes and products.
Information Technology: online selling portals, e-commerce websites compete with traditional physical outlets
Changing Customer Needs and Preferences: forces companies to introduce changes in their products and services to attract customers
Types of Competitions:
Perfect competition exists in a market where products or services are substitutable, all firms are price takers, all the market information is readily available to both consumers and suppliers, and there are no barriers on entry or exit of a firm.
It is a theoretical market and often used as a benchmark to study all other forms of market.
Imperfect competitions exist in market where a firm or a group of firms dominate the market in terms of market share, price dictation, barrier on entry or exit etc.
Forms of imperfect competitions are oligopoly, monopoly etc. and are ubiquitous.
Generally competitions are said to be favourable to customers because they are supposed to increase rivalry among the firms and hence help in price reduction. However, firms may indulge in malpractices like cartelization, certain forms of merger and acquisitions to make the competitions worse for consumers. In India, Competition Commission of India (CCI) ensures that healthy practices prevail in competitions.