V. The Meaning of Competition
1
Many economists are starting to notice that their idea of "competition" is not the same as what people usually think of when they hear the word. Although some economists have tried to bring this topic back to real-life challenges, most still believe in the theory of "perfect competition." They think this model is the best way to judge real competition and view any differences as bad. However, this belief has little support. The theory of perfect competition assumes a situation that doesn’t really exist, which makes it hard to understand the true nature of competition and its role in the economy. Economists often focus on a concept called "competitive equilibrium," where everyone's plans fit perfectly together. This fixed view does not explain how these conditions are actually achieved, missing the important idea that competition is a dynamic process. Competition involves ongoing changes and interactions among individuals, not just a static state. By focusing too much on static analysis, economists overlook the real, changing nature of competition.
2
The theory of competitive equilibrium explains how competition works in markets and focuses on the idea of perfect competition. For perfect competition to exist, three main conditions must be met: first, there must be a standard product sold by many small sellers and buyers, none of whom can affect the price; second, anyone should be able to enter the market freely without barriers; and third, everyone in the market should have complete knowledge of important factors.
However, these conditions are complicated. The idea that everyone has perfect knowledge is especially tricky because it suggests that people already know things about the market that they would learn through competition. For example, sellers are expected to know the lowest cost to produce their goods and what consumers want, but this information is usually discovered only through competition.
Buyers also don’t have all the knowledge they need at the start. They learn about their options as competition in the market takes place, often through advertising and other market activities.
Interestingly, in a perfectly competitive market, actions like advertising, lowering prices, or changing how products are made wouldn't happen. The theory assumes that these competitive activities don't affect how prices and products are determined. Personal connections and reputation are also left out of this theory, even though they matter a lot in real life.
Additionally, the assumption that all producers create identical products and can easily learn about each other is too simple. In reality, no two products are the same, which complicates the idea of perfect competition.
Lastly, some people think that making products more similar could improve how resources are used in perfect competition, but this view ignores the importance of variety and innovation. Striving for perfect competition by standardizing products may not actually lead to better outcomes in the economy.
3
Understanding competition can be improved by looking beyond the traditional idea of perfect competition, particularly in markets where no two products or producers are exactly the same. In these markets, competition still plays a crucial role in determining prices. Even if products are close substitutes and not identical, the market can find a balance where prices are set just low enough to outbid alternatives, which is significant since finding such prices by other methods would be very difficult.
In a scenario where competition is restricted, for example, by licensing or price control, there would likely be inefficiencies. Producers might not be the best qualified, and the products available may not meet consumer preferences. The key issue is not just getting products at specific prices but figuring out which goods and services can most effectively meet people's needs at the lowest cost.
Moreover, competition allows for innovation and cost reduction, benefiting society. A producer who knows how to significantly cut production costs helps lower prices for everyone. Ultimately, without competition, it's unlikely that the market would operate as efficiently or effectively, leading to missed opportunities for better resource use and product availability.
4
In real life, the situations of different producers are almost never the same due to various factors that the theory of perfect competition does not consider. This theory focuses on a long-term balance that cannot truly happen in our ever-changing world. Each company’s resources are shaped by past events, and the main issue is how to use these resources effectively instead of trying to fit them into an ideal market. Focusing too much on long-term ideas can lead to misleading policies, such as promoting “orderly competition,” which aims to keep prices at long-term costs and can end up supporting monopolies instead of fair competition.
In an actual market, there is usually one producer who can make a product at the lowest cost. Other producers try to compete, which leads to active competition rather than a perfect state. To really understand competition, we need to look at how it works over time, especially during short periods of change after something new happens in the market. Competition is important in complex markets where changes take time to adjust to, even if competition is strong or there are other barriers. Real competition is essential, even when markets are imperfect, and it is crucial to use available resources wisely in a world that is always changing.
5
The argument says that competition does not need to be perfect to use resources effectively; even when it is not perfect, it is still better than other systems. Real competition helps produce goods and services efficiently and generally keeps prices lower. The main concern should be whether competition is present at all, instead of trying to make it perfect, because the lack of competition can lead to bigger issues than small flaws. When competition is suppressed, it often results in higher costs and enables monopolies to form. However, efficient monopolies are not as harmful if they face competition from better providers. Lastly, competition is important because it spreads information, helping people understand their options and opportunities in the market.
1
Many economists are starting to notice that their idea of "competition" is not the same as what people usually think of when they hear the word. Although some economists have tried to bring this topic back to real-life challenges, most still believe in the theory of "perfect competition." They think this model is the best way to judge real competition and view any differences as bad. However, this belief has little support. The theory of perfect competition assumes a situation that doesn’t really exist, which makes it hard to understand the true nature of competition and its role in the economy. Economists often focus on a concept called "competitive equilibrium," where everyone's plans fit perfectly together. This fixed view does not explain how these conditions are actually achieved, missing the important idea that competition is a dynamic process. Competition involves ongoing changes and interactions among individuals, not just a static state. By focusing too much on static analysis, economists overlook the real, changing nature of competition.
2
The theory of competitive equilibrium explains how competition works in markets and focuses on the idea of perfect competition. For perfect competition to exist, three main conditions must be met: first, there must be a standard product sold by many small sellers and buyers, none of whom can affect the price; second, anyone should be able to enter the market freely without barriers; and third, everyone in the market should have complete knowledge of important factors.
However, these conditions are complicated. The idea that everyone has perfect knowledge is especially tricky because it suggests that people already know things about the market that they would learn through competition. For example, sellers are expected to know the lowest cost to produce their goods and what consumers want, but this information is usually discovered only through competition.
Buyers also don’t have all the knowledge they need at the start. They learn about their options as competition in the market takes place, often through advertising and other market activities.
Interestingly, in a perfectly competitive market, actions like advertising, lowering prices, or changing how products are made wouldn't happen. The theory assumes that these competitive activities don't affect how prices and products are determined. Personal connections and reputation are also left out of this theory, even though they matter a lot in real life.
Additionally, the assumption that all producers create identical products and can easily learn about each other is too simple. In reality, no two products are the same, which complicates the idea of perfect competition.
Lastly, some people think that making products more similar could improve how resources are used in perfect competition, but this view ignores the importance of variety and innovation. Striving for perfect competition by standardizing products may not actually lead to better outcomes in the economy.
3
Understanding competition can be improved by looking beyond the traditional idea of perfect competition, particularly in markets where no two products or producers are exactly the same. In these markets, competition still plays a crucial role in determining prices. Even if products are close substitutes and not identical, the market can find a balance where prices are set just low enough to outbid alternatives, which is significant since finding such prices by other methods would be very difficult.
In a scenario where competition is restricted, for example, by licensing or price control, there would likely be inefficiencies. Producers might not be the best qualified, and the products available may not meet consumer preferences. The key issue is not just getting products at specific prices but figuring out which goods and services can most effectively meet people's needs at the lowest cost.
Moreover, competition allows for innovation and cost reduction, benefiting society. A producer who knows how to significantly cut production costs helps lower prices for everyone. Ultimately, without competition, it's unlikely that the market would operate as efficiently or effectively, leading to missed opportunities for better resource use and product availability.
4
In real life, the situations of different producers are almost never the same due to various factors that the theory of perfect competition does not consider. This theory focuses on a long-term balance that cannot truly happen in our ever-changing world. Each company’s resources are shaped by past events, and the main issue is how to use these resources effectively instead of trying to fit them into an ideal market. Focusing too much on long-term ideas can lead to misleading policies, such as promoting “orderly competition,” which aims to keep prices at long-term costs and can end up supporting monopolies instead of fair competition.
In an actual market, there is usually one producer who can make a product at the lowest cost. Other producers try to compete, which leads to active competition rather than a perfect state. To really understand competition, we need to look at how it works over time, especially during short periods of change after something new happens in the market. Competition is important in complex markets where changes take time to adjust to, even if competition is strong or there are other barriers. Real competition is essential, even when markets are imperfect, and it is crucial to use available resources wisely in a world that is always changing.
5
The argument says that competition does not need to be perfect to use resources effectively; even when it is not perfect, it is still better than other systems. Real competition helps produce goods and services efficiently and generally keeps prices lower. The main concern should be whether competition is present at all, instead of trying to make it perfect, because the lack of competition can lead to bigger issues than small flaws. When competition is suppressed, it often results in higher costs and enables monopolies to form. However, efficient monopolies are not as harmful if they face competition from better providers. Lastly, competition is important because it spreads information, helping people understand their options and opportunities in the market.