What is competition? Definition and examples

In economics, competition is a situation in which one company tries to be more successful than another. One business may be trying to sell more than a rival. It may also be striving to gain greater market share. Often, several companies are competing. The word refers to a race, in which the suppliers of goods or services try to beat their rivals.

In a non-business context, the word refers to a contest or rivalry involving at least two competitors. We use the term in sports, nature, science, social groups, etc. In fact, we use it in any situation in which one entity is trying to beat at least one other entity.

This article focuses on competition’s meanings in a business context.

BusinessDictionary.com has the following definition of the term:

“Rivalry in which every seller tries to get what other sellers are seeking at the same time: sales, profit, and market share by offering the best practicable combination of price, quality, and service.”

“Where the market information flows freely, competition plays a regulatory function in balancing demand and supply.”

Competition in a free market

In a free-market economy, market forces determine the prices of goods and services. The term ‘market forces’ refers to supply and demand.

In a free market, governments do not interfere in price-setting and determining what and how much to produce. A free market is an open market.

In a free market, there is competition between suppliers of goods and services. Consumers decide who to buy from, based on price, quality, reputation, word-of-mouth, etc.

The free market contrasts with the regulated market or command economy, where the government dictates what happens.

Free competition does not really exist

Many countries, such as the United States and United Kingdom, say that there is free competition in their countries.

However, during the 2007/8 Global Financial Crisis and the Great Recession that followed, their governments bailed out many banks.

A bailout is an act of giving financial assistance to a company that is on the verge of collapsing. In other words, saving a company’s life with money.

During that period, some banks were in serious trouble. They asked the government, i.e., the taxpayer, for help. The American and British governments bailed them out to the tune of hundreds of billions of dollars and pounds.

In a market with truly free competition, the governments would not have intervened. Most other advanced economies, which claim to have free competition, also bailed out their banks.

The governments bailed out banks because they said they were ‘too big to fail.’ In other words, if they had collapsed, they might have brought the rest of the country down with them.

Believers in free competition say that the bailouts were a huge mistake. Banks would not learn from their mistakes and would repeat the behaviors that got them into trouble in the first place.

What is non-price competition?

Non-price competition is competition between businesses that focuses on extra services, benefits, quality, and good workmanship. In other words,  product’s or service’s good features apart from price.

Rivals may adopt this policy if they do not want to risk a price war. Price wars can cause serious damage to companies.

According to the Market Business News Glossary:

“Non-price competition is a marketing strategy that typically includes promotional expenditures such as sales staff, sales promotions, special orders, free gifts, coupons, and advertising.”