Basics of Competition

Key aspects of competition explained.

By Marcia Smith

Is competition necessary for a capitalist economy?

Yes, competition among businesses and people is necessary for an economy to be considered ‘capitalist’. That does not mean free reign is given to businesses to operate outside of the scope of government regulation, however. In fact, statutes that protect personal property, for example, are essential within capitalism.

Essentially, required for capitalism are privately owned industries operating for profit; there are many corollaries that may follow from this, competition being one

What is monopolistic competition?

Monopolistic competition is in some senses the opposite of perfect competition. Under this type of market a number of suppliers are all targeting the same market, however, each supplier offers a unique product or service from all other competitors. In the short-term, firms can act like monopolies, but over a longer period, as more firms enter the market the benefits of differentiation decrease.

Although niches exist in this market, in general a monopolistic market has many consumers and many producers, and therefore no business can exert total control over the market price.

What is pure competition?

Pure competition, also known as perfect competition, is a market which has a large number of independent sellers of a standardized product i.e. every seller is offering the same or very similar goods.

Perfectly competitive markets have four basic characteristics:

A large number of firms supplying the product
Standardized or homogeneous products
Low entry and exit costs to enter and leave the marketplace
Suppliers are considered 'price takers' because each supplier has only a tiny share of the total market and cannot influence the market price.

Can there ever be no competition?

A complete absence of competition in a market is almost impossible. Nationalised industries can have monopolies, but even if your product is brand new, there are very likely to be incumbents that will count as competition. Take Amazon — while no one necessarily sold books online when they launched, traditional bookshops were still competitors to Amazon.

Does UK competition law differ to other countries' rules?

UK competition law is broadly in line with the regulations and principles in place in the rest of the world – and particularly in other EU member states, which share a common regulatory framework due to the common market.

US competition law has a greater emphasis on consumer protection rather than market efficiency, whereas UK and EU regulations are more focused on preventing barriers to trade. The US has a higher threshold for monopolies, whereas the EU has looser standards of proof for unfair conduct. In terms of enforcement, the US takes a more litigious and sometimes criminal approach, whereas in the UK and EU enforcement is more regulatory and bureaucratic.