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.
Put simply, competition can mean a couple of things:
- It’s when people or groups are trying to be better or more successful than others—like in sports, business, or even school.
- It can also refer to a specific event where people compete to win a prize by being the best, fastest, or most skilled—like a talent show, race, or science fair.
This article focuses on competition’s meanings in a business context.
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.
Competition in a free market incentivizes innovation and efficiency, leading to a wider selection of products and services, which often results in better quality and lower prices for consumers.
Additionally, robust competition fosters a dynamic business environment where continuous improvement and customer focus become critical for survival, ultimately driving economic growth and prosperity.
Examples
Coca-Cola vs. Pepsi
One of the most iconic rivalries showcasing competition in a free market is the decades-long battle between The Coca-Cola Company and PepsiCo. Both companies produce cola-flavored beverages (namely Coca-Cola and Pepsi, respectively).
In a free market, the two companies continuously innovate to create beverages that cater to varying consumer tastes. These innovations can be seen in their product diversification, which has expanded from standard colas to include diet versions, zero-sugar versions, and flavored colas.
The competition isn’t limited to just product offerings; it extends to marketing campaigns, sponsorships, and promotional events. Both companies invest heavily in advertising to sway consumers towards their brand. This rivalry ensures that each company remains on its toes, constantly seeking to better its product and branding to gain an edge over the other.
Price is another arena of their competition. If the Coca-Cola Company were to significantly increase the price of Coca-Cola, some consumers might switch to Pepsi, assuming the quality and taste remain consistent. Similarly, if PepsiCo were to significantly lower the price of Pepsi, it might lure some of Coca-Cola’s customer base.
Netflix vs. Prime Video
Another modern example of competition in a free market can be seen in the streaming wars, especially between Netflix and Prime Video.
Netflix, which started as a DVD-by-mail service, evolved into the world’s leading streaming platform. Recognizing the potential of online streaming, Amazon introduced Prime Video, a service available to its Prime members.
Both platforms compete fiercely for viewership. They do this not just by offering a vast array of movies and TV shows, but by investing heavily in original content. Shows like “Stranger Things” on Netflix or “The Lord of the Rings: The Rings of Power” on Prime Video are testaments to their commitment to providing unique content to lure and retain subscribers.
The competition also manifests in pricing strategies, user interface design, streaming quality, and customer service. As each platform competes for market dominance, they continuously innovate to enhance user experience.
Moreover, these companies also compete on a global scale, tailoring content for different regions and even producing original shows and movies specific to certain countries.
Drives innovation
In both these examples, the competition in a free market drives innovation, ensuring that consumers benefit from better products, services, and prices. Without such competition, there would be less incentive for these companies to continuously evolve and improve.
Does free competition 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.”