Market competition could be defined as a business environment where different firms, located both within and out of a country, have to compete with one another solely on the merits of their goods and services.
By distinction, uncompetitive markets could be defined as a business environment in which firms receive special treatment and are protected from competition.
Countries that have and encourage competitive markets tend to encourage the entrepreneurial spirit and experience economic expansion over the long-term. Countries that suppress market competition, however, tend to have less entrepreneurs and therefore, experience less economic growth.
Why Market Competition is Better
It was Michael Fairbanks, author of “In The River They Swim” said the following: “I can predict the future of a developing nation better than any IMF [International Monetary Fund] team of economists by asking one question: ‘Do you believe in competition?’” It is obvious that when competing with others, individuals are triggered to a levels of performance they would not otherwise achieve.
The same is true of firms within a market. Without competition, the impetus to continuously innovate and improve is lacking; a higher level of performance is never achieved.
Countries who embrace and encourage competition will reap the rewards. Those countries who fear competition and focus only on its negative effects, often falter and become stagnate
Market Competition: Pros
There are many benefits to competitive markets. One of them are, When firms have to incessantly compete with one another for sales and market share, they are incentivized to do so through the provision of goods and services that are superior to that of their rivals.
In this atmosphere, firms must continually struggle to surpass another in making available new, better, and less expensive goods and services.
The company that does this the best “wins.” The consumer, nevertheless, is eventually the winner in this scenario as their subjective needs and wants are being met at a fair, market price.
Because a competitive market brings down prices, this frees up resources for a consumer to spend on other goods and services. Instead of having to spend the preponderance of their money on good X, for example, they now have money to spend on service Y as well.
This bolsters business and employment in more industries across the economy.
Competitive markets also encourage the most efficient and valued use of scarce resources. When companies are not driven to focus on costs due to competition, there is less incentive to maximize efficiency and minimize waste.
When a market is competitive, firms only succeed when they use those precious resources in the most effective, valuable way possible and waste is diminished.
Market Competition: Cons
Market competition does result in some parties “losing.” This loss could come in the form of a company bankruptcy. Whole industries may be damage. People lose their Jobs. People suffer the financial and emotional toll of those job losses.
These are instances of the negative effects of competitive markets that should not be left unchecked
However, as challenging as these negative effects are, the net, long-term benefits of competitive markets are much greater. New products and services are created and immensely improve living standards.
Items can be bought at a lower price, freeing up money to be spent elsewhere, and subsequently boosting revenues in other industries. New industries are born out of competition and create millions of new jobs.
Tipping the Scales
Countries can have uncompetitive markets for a number of reasons, many of which involve a country’s national government tipping the scales in favor of one company over another.
A national government can do this a number of ways. One way is through providing a favored company with subsidies or tax breaks, while failing to do so for other companies.
Sometimes a politically well-connected firm might secure monopoly power within a particular market at the expensive of all would-be competitors.
The most popular methods of stifling competition employed by governments include tariffs, quotas, and other trade barriers. Employed by governments of both developed and developing countries alike, trade barriers are meant to protect domestic producers from cheaper, foreign imports.
Western governments, for example, have protected their agricultural sectors from foreign competition for decades. They have done so through very high tariffs. In the end, this not only hurts the majority of their consumers but also young, nascent firms in the developing world.
Types of Competitors
Below is are the types of market competition
Direct competitors – A direct competitor provides the same products and services meant at the same target market and customer base, with the equal goal of profit and market share growth.what this means is that your direct competitors are aiming at the same audience as you, selling the same products as you, in a same distribution model as you.
Let’s think about office supply stores, for instance. For a long time, one of Staples’ largest direct competitors was Office Depot.
If you’ve ever been inside these two stores, you know that they function in the same ways and provide many of the same products and services.
Fascinatingly, Staples not long ago, acquired Office Depot in a merger as a solution to the problem of their long running competition.
A direct competitor is what normally comes to mind when you refer to the term competition, and mostly the type that draws the most emphasis from companies when designing strategies.
Nevertheless, customers will shop for a different price points, locations, service levels, and product features when considering their purchase.
But they will not essentially choose the same mix of these options in every comparison. They might explore as many options as they can to fill their need, which may include looking at a distinct service model or a different product altogether.
This is where competition becomes a factor. Recognizing where you have potential competition is a key factor in determining the strongest markets for your business solutions.
Indirect Competitors – An indirect competitor is another company that offers the same products and services, much like direct competitors; however, the end goals are different. These competitors are seeking to grow revenue with a different strategy.