Competition is free: concept, mechanism, pricing

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

The main feature of any market is competition. Along with supply and demand, this element makes it function.

Term Definition

In fact, competition is called various types of economic rivalry between those firms, companies and entrepreneurs who are engaged in the production of goods or services. The goal of their confrontation is to obtain more favorable conditions for conducting production activities, selling their product and, consequently, increasing profits.

The essence of competition

The presence of competition acts as a motivating factor that encourages entrepreneurs to look for more profitable solutions to emerging production issues and problems. Competition has a special effect on the quality of the product, as well as on the speed of its sale.

Sometimes forms of economic rivalry reach grandiose proportions, and the intensity of passions and emotions reaches such a level that the expression "competitive struggle" becomes more than appropriate.

How competition is good for the market

When entering the market, manufacturersforced to constantly defend their positions, otherwise they will be among the many inconspicuous sellers of typical products. To attract the attention of the buyer, they apply new technologies, update the range, closely monitor new scientific and technical developments and introduce them into their production processes. In addition, it is in the interests of the manufacturer to apply a rational approach to the distribution of its resources (material, labor, financial).

Competitive market conditions allow consumers to enjoy the most efficient, effective, attractive and cost-effective products.

Types of competition

Such a significant concept as "competition" combines a large number of narrower terms. There is a classification of competition according to various criteria, as a result of which the following types are distinguished:

• Intra-industry.
• Intersectoral.
• Fair.
• Unfair.
• Price.
• Non-price.

From the point of view of the restrictions that operate on the market, there is competition free (pure, perfect) and imperfect. Next, the features of the functioning of the market in conditions of perfect competition will be considered.

Market economy of free competition

Perfect competition is called when there are numerous buyers and sellers (manufacturers) on the market, who individually occupy a rather small segment of the market and cannot set anyconditions for the sale or purchase of products.

It should be noted that perfect free competition is considered rather a theoretical concept that is extremely rare in the real world (for example, the securities market is closest to this model).

With free competition, information about price fluctuations, the state of supply and demand, as well as about manufacturing enterprises and buyers becomes publicly available even at the interregional level.

Another feature of pure competition is free pricing. That is, the price is set not by the manufacturer, but by the ratio of supply and demand.

Signs of a perfect competition market

You can judge the situation in a particular market by studying the features that characterize the system of free competition:

1. Multiple sellers (and buyers) represent similar types of products (or buying interest) and are equal in their rights.
2. There are no barriers to prevent a new entrant from entering the market.
3. All market participants have access to full product information.
4. Sale goods are homogeneous and divisible.
5. The absence of the possibility of using non-economic means of influence by one participant in relation to others.
6. Factors of production are characterized by mobility.
7. Free pricing.
8. No monopoly (single seller), monopsony (single buyer) and government influence on pricing or we althsupply and demand.

The absence of at least one of the listed signs does not allow us to say that competition is free (in this case, it is imperfect). At the same time, the deliberate removal of features to form a monopoly leads to unfair competition.

How perfect competition is good for the economy

The mechanism of free competition allows creating special conditions in the market that benefit both producers and consumers of the product:

• It's no secret that some decisions made by a particular person or organization can significantly affect the achievement of desired goals. The advantage of having competition in the market is the depersonalization of solutions to economic problems, since there is no personal involvement of the entrepreneur or government official. At the same time, it is pointless to lay claim to the obstacles that arise due to the play of competitive market forces.
• The conditions of free competition dictate unlimited freedom of choice. Any market participant has the opportunity to freely choose the area of professional activity, make purchases, and conduct economic activities. Only the degree of talent can act as a limitation, as well as whether the entrepreneur is able to accumulate the necessary capital.
• The main advantage of pure competition can be considered the formation of such conditions for the producer and consumer when they both win.



The described factor comes into force due to the balancing of supply and demand indicators and the formation of the equilibrium price. This concept characterizes the price level that corresponds to the marginal utility of the product for the buyer and corresponds to the level of production costs.

• A market with free competition can be called a regulator of social production, since it makes it possible to solve a number of problems of a specific economic nature with its help. It ensures the existence of conditions for the optimal use of scientific and technical developments that are used in the production of new products (the introduction of new techniques and technologies, the development of improved methods for organizing and managing the production process). Market participants are forced to adapt and adapt to new requirements for quality, appearance and cost of products.
• The goal of the free market system becomes the ultimate human need. Thanks to this, the entire economy is focused on consumers and their needs (which are expressed in effective demand).
• A market with perfect competition (free, pure) is characterized by the optimal distribution of limited resources: they are used where it can be done most efficiently.

The role of the state in market relations

Opinions of many economists agree that the market structure is not able to meet the needs of all members of society, thereforeit is necessary to introduce another institution capable of coping with this task. These functions are assumed by the state. In order to restore equilibrium in the market, the state is taking some measures to regulate market relations and competition as well. The main legal act is the Federal Law "On Protection of Competition", its provisions are mainly aimed at creating obstacles to the formation of monopolies.

Disadvantages and problems of free competition

In the list of the main socio-economic problems that cannot be solved by the market, the following can be listed:

• Inability to provide the economy with sufficient financial resources. Therefore, the state is organizing the country's money circulation.
• The inability to meet the specific needs of society. Free competition provides for the satisfaction of those needs that can be expressed by individual payment demand, but others must be taken into account (roads, dams, public transport and other benefits intended for collective use).
• Insufficiently flexible system of income distribution. The market mechanism perceives as fair any kind of income received from competition. However, this does not take into account such social strata as the disabled, pensioners, poor and disabled citizens. For this reason, the intervention of government agencies and the redistribution of income becomes a necessity.

In addition, the functioning of the market of perfect competition does not provide for a careful attitude to non-reproducible resources and concern for their safety. To avoid the depletion and irrational use of forests, subsoil and marine resources, as well as to avoid the extermination of certain species of animals and plants, the state is forced to introduce strict rules and laws. The Federal Law "On Protection of Competition" is important, but not the only one, since the market is a rather complex structure, and its regulation requires taking into account many factors.