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What is Competition in the Economy? Is it Desirable?

1062 words | 4 page(s)

Competition in the economy encompasses the rivalry among different sellers in given market structures trying to achieve common goals such as increased market share, profits, revenues and sales volumes (Lawson, 2015). Consequently, these sellers compete through manipulating some of their marketing mix strategies such as changing the prices, product attributes, promotion and the game theory tactics to hedge their selves in the better positions where they achieve the maximum utility. In other words it can be reflected as the rival between two parties that act independently in an effort of securing the business of a third party through offering of the most favourable business terms (Backhouse and Boianovsky, 2013). Competition in the economy was once described by Adam Smith with a key reflection on its encouragement of market efficiency. Competition is one of the main key determinants of market setting and structures; key influencing factors of price and quantity that is demanded for a particular good.

Competition has led to enhanced consumer sovereignty within the economy. Such an idea is made easy as buyers tend to compete with fellow buyers for the most competitive quantities with the most competitive prices, while sellers compete for bidding against other sellers who offer similar products in the markets. One of the key factors that leads to competition in the economy is the scarcity of the economic resources. The scarce the resources they are, the more the competition. However, for this process to work, the price levels that are offered in the market need to signal the benefits and costs. On the other hand, there are different factors that lead to reduced competitive process. The existence of externalities, oligopolistic and monopolistic, as well as, the provision of a public good, competition is sharply reduced as motives of the sellers under these conditions are not necessarily influenced externally (Lawson, 2015).

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Nevertheless, competition has led to different market aspects such as anti-competition policies, protectionism among other policies depending with the market structure. However, these aspects can be can be subjected to the lens of different schools of economic thoughts for detailed insights and synthesis. Classical, Marxist and Neo-classical are the main schools of economic thoughts that shed some light on market completion and its significance. Therefore, the paper reflects on Marxist and the Neo-classical thoughts to unpack the architectonics and the working logic of competition theory in an economy to determine how desirable it is.

Marxist school of thought has had a significant thought in defining and explaining completion in an economy. Led by Karl Marx, the school proposes that competition is an emulation that aims at making profits. However, Marx made a clear distinction between commercial and industrial objectives of emulation. The underlying objective of industrial emulation entails the product that the industries are making. On the other hand, commercial emulation has their underlying goals as making profits. Therefore, market competition came to the light with the emergence of the joint-stock firms, as it can be realized that these companies can make profits via speculation of the markets without producing, hence commercial emulation. Accordingly, it can be identified that periodic speculation entails part of essential components of market competition (Foley, 1986).

The aspect of market competition is based on the capitalism. In the process of emulation, the different types of market capitals strive to make profits. Under this scenario, Marx sees competition as that action of capital upon capital and that free competition within the markets is the relationship between capital and itself as another capital. Accordingly, the inherent laws regarding capital are only realized through competition and these laws make every capitalist follow these laws in order to make profits. Additionally, the immanent motives are the directing motives for every individual capitalist in the market; therefore, the law of competition is basically rooted in the inner nature of capital. In other words it can be said that Marx has static theory regarding the market competition (Foley, 1986).

The Neoclassical school of thought is also referred to the Adam Smith’s theory of competition. Adam Smith believes in perfect competition in the economy. The neoclassical believe that the economy operates on a few assumptions in that the economic decisions are rationally made by informed parties. Such an idea translates that the parties are utilitarian and their decisions are made with full information from the market, hence perfect flow of information. Perfect flow of information is one of the essential components of the perfect competition. The Neo-classical economists argue that perfect competition is the basic aspect that can produce the best possible outcomes for the society and the consumers (Hennings and Samuels, 1990).

Under this school of thought, perfect competition is real in an economy. Therefore, a competitive market will exhibit the following credentials. First there is perfect knowledge among the participants. The theory assumes that there are no time lags in information transmission. Additionally, the knowledge is available for free indicating that taking risks is minimal. On the other hand, there are no barriers to entry into or exit from the markets. Firms operating in such a market structure are free to exercise their freedom regarding entry and any time they feel to move out. Since there are a large number of sellers, exit or entry of a small number of firms has no influence to the prices and the quantity sold by the other firms (Hennings and Samuels, 1990).

There is production of homogenous products indicating that firms will produce similar products hence change of products cannot influence the demand of other products hence marketing mix strategies for a single firm have no effect to the rest. Neo-classical thought does not identify any need for government intervention for the markets as they assume that the market forces are enough to sustain the equilibrium for the products and services. However, government can intervene under cases where the government wants to make markets for certain products more competitive. On the other hand, there are no market externalities indicating that are no external costs and benefits and therefore, the firms are making normal profits in the long-run. However, in the short-run these firms can make abnormal profits as firms have not fully entered the markets, therefore, the little firms available make these supernormal profits. However, in the long-run firms enter the market and supply curve shifts to the rights and the MC curve cuts the AC curve from the bottom for normal profits (Hennings and Samuels, 1990).

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