Microeconomics
Do Consumers Benefit From Competition in a Market Set Up?
Introduction
One of the main goals of microeconomics is to conduct an analysis on the market mechanisms responsible for determining relative prices of commodities in the market. Competition is vital in the setting of prices of commodities. This leads to many economists asking the rather autonomous question of whether competition is important to consumers or not. Many scholars, researchers and students alike have dissected this question and analyzed repeatedly in a bid to find the true relevance of competition and decide whether it causes harm or gain to the consumer (Niels& van Dijk 352).
Economists in favor of competition argue on the front of bringing forth the positive effects of competition to the market mostly made up of consumers as the end receivers of the commodities. Not only the government but also international trade laws support a healthy competition. The government sees competition as unavoidable and encourages it as long as businesses practice it within the constraints of the law. Other economists dispute this subjective fact by stating that consumers would be at a better position to enjoy better prices and businesses would prosper if competition did not exist (Niels& van Dijk 355).
A renowned economist by the name Erik Sink ones stated that the major problem businesses would face when they try to avoid competition is the realization that in doing so, they are avoiding customers as well. He iterates his point by arguing that where there exists competition there is naturally a hoard of customers eager to spend. Competition exists on the basis that a person would use a concept already created, identify the loopholes it contains and try to improve on the idea to attract more customers. Therefore, Erik states that if there is nobody interested in taking advantage of your idea to make money, then the person needs to evaluate whether there is money to be made in that area or not. The concept of competition comes to play at this point as it describes the need for a healthy competition to spur excitement and encourage customers to spend (Niels& van Dijk 356).
Though the argument of competition is mainly on businesses competing for available market, he states that the aspect of competition is intertwined with the consumers and where competition is not present the consumers are less likely to exist. Businesses thrive on the basis that success does not only mean coming up from new ideas but from old ideas fully utilized to their maximum potential. Economists believe that new ideas are not as valuable as people think; for example, tapping in a market not explored means automatic success. This is not ideally true. The big picture may be that the venture is unexplored because there is no real value for that type of business. The main point addressed is that consumers are positive about healthy competition; they will buy more of the product that is attractive, safe and considerate about their income (Niels& van Dijk 358).
Arguments In Favor Of Competition
For the market to work effectively, competition has to be there. Some of the arguments that support the benefits of competition to consumers are presented further. Competition encourages creativity among businesses; in a bid to acquire a greater market share, business develops better products suitable to meet consumer needs, improve on the creativity in terms of product design, quality and service provision. Competition encourages businesses to develop continuously better products and services to stay ahead of the competition. Consumers are the ones who benefit from competition as they get better quality products, up to date technology, new software from the manufacturers who try to improve the level of service delivery to the customers. This means when a business becomes innovative in terms of developing its products and tailoring them to suit customer needs, they attract more customer attention that helps them to stay ahead of their competition (Niels& van Dijk 360).
Apart from this, businesses will want to attract more customers than their competitors do and in a bid to do so they will have to reduce the prices of their products or face poor turnover at the end of the year. When businesses try to attract the same market, stiff competition compels them to reduce their prices otherwise they will face the possibility of losing the customers. Consumers are privy of market prices of different products. They will go for the product that is of good quality and is friendly to their pockets. This fact does not just benefit consumers alone but rather the fact that when prices are low, more customers will buy the commodity. This will encourage businesses to boost their production volumes to increase their sale margin contributing to the positive development of the economy (Niels& van Dijk 362).
Besides, all businesses want to stay ahead of their competitors and to do so means they will have to increase their market share by attracting more customers to buy their product instead of their competitor’s product. To do this, they will have to improve the quality of their product. Businesses will also improve the quality of service provided to their customers who in the end will prefer one business’s products and service instead of another. Consumers will benefit from high quality products while businesses will generate greater sales in the long run. It will also encourage other businesses to improve the quality of their products that they do not lose their customers (Harrington & Katsoulacos 123).
Customers have wide range of products to choose from. In a competitive situation where businesses are not competing through price wars, product differentiation becomes the best competitive advantage. Differentiation is one of the techniques that businesses use to distinguish their products from those of their competitors. They may do this through designing and packaging their products differently. Businesses may also use different colors and flavors to attract more customers to buy their products. This benefits customers as they have different alternatives to choose from. However, consumers in the end will chose the product that provides a balance between the price and quality they receive from the product (Niels& van Dijk 365).
What is also benefitial is attractive incentives. These are after-sale services provided to customers for free or at a small price such as installation, free delivery, maintenance and warranty services. Consumers will feel more attracted to products that have incentives. For example, for every 2-liter bottle of soda you buy you get a free bar of chocolate.
Foreign investors are attracted to invest in a country with competition. The matter is that foreigners invest in markets with healthy competition as the competition itself provides an indication that there is profit in that venture. This means that once foreigners invest in the country, consumers will receive quality goods and services. Foreign investment means more opportunities for employment to the residents. As a result, the residents increase their purchasing power and are more financially stable to buy the commodities (Harrington & Katsoulacos 130).
Dead Weight Loss Effect To Consumers
To show the importance of competition, a market structure is selected where there is no competition. Monopoly is such a scenario where a firm is the only manufacturer of a particular product, which means that competition does not exist. Statistics have shown that a firm that operates as a monopoly is more likely to raise the prices of their products bearing in mind that consumers will have no choice but to purchase them. This firm will continue to increase the amount of product as long as there is demand for them. A monopoly in the end does not gather the needs of customers who are not comfortable to buy the product at such a high price. This leads to a situation known as “dead weight loss” as shown by the graph below (Harrington & Katsoulacos 143).
Price
A
P2 B MC
P1 C
D
O Q1 Q2 Quantity
The consumer surplus is represented by the area AP2B while the supplier’s surplus is represented by the area ODBP2. Region BDC represents the dead weight area. Dead weight loss refers to the situation where the economic efficiency in the market goes down that comes about when consumer has less marginal utility than marginal cost but decides to purchase a commodity. It can as well be a scenario where those consumers holding more marginal utility than marginal cost decide not to buy the product. The supplier’s surplus occupies a greater region on the graph because the monopoly firm sets a price that is above the market equilibrium (Harrington & Katsoulacos 147).
Argument Against Competition
On the other hand, when competition stops being healthy, it can have serious ramifications to both the customer and the economy in general. Further there are some arguments against competition (Jeffers & Nault 72). High competition leads to increased cost of operating the business. This means that the company will be forced to pay low salaries to reduce the cost of doing business. When employees are paid poorly, they lack the purchasing power which in the end decreases the quantity of products manufactured since the employees are also the customers who buy the product.
Due to high competition, companies have advanced their technology that has had adverse effects on the company employees who end up losing their jobs as the machines take up the work previously done by a man. Losing their jobs means that they will not have the purchasing power to buy the product. The price wars may be seen as beneficial to employees but may end up hurting the economy. After some time the currency loses its value due to constant market instability; therefore, the consumer loses his buying power. Price wars are brought by competition as each company wants to outdo the competitors (Niels& van Dijk 367).
Where competition is high, companies reduce their focus on corporate social responsibility as they channel all their resources to increasing their profits and value maximization for their shareholders. Businesses become less corncerned with the interest of the people and only prioritize in improving their profit figures (Jeffers & Nault 75).
Corruption takes a hold of the business community as each company tries to outdo another. Businesses end up bringing poor substandard materials for their production purpose and bribe government officials not to say anything. The low cost materials are meant to reduce the cost of operating the business that is brought along by stiff competition. Customers are the big losers because they end up with poor quality products in the end (Jeffers & Nault 77).
There is a rampant problem that arises as a result of competition – degradation of the environment. As businesses try to cut down cost of operating the business, they turn a blind eye on proper waste management that is usually costly to the business. The result is businesses paying little attention to the health of the environment by throwing off harmful waste products into the environment (Jeffers & Nault 78).
Conclusion
Economists in the end will have to look at whether the benefits are greater than the consequences of competition. Analyzing these two arguments will provide economists with broader perspectives into the effects of competition and decision whether competition is important to consumers or not. One major fact that economists agree on is that the economy cannot run on its own. Demand and supply forces play an important role in the determination of equilibrium prices in a free market. Where monopoly does not exist, business will have monopoly of the market. The effect will be high prices and poor quality products detrimental to all consumers. It is because of competition that businesses are kept on their toes to produce quality goods and services otherwise face the risk of losing their customers. Analyzing the arguments for and against competition it is ripe to agree that competition is necessary in the market and very important for consumers of a country (Harrington & Katsoulacos 2012).
Works Cited
Harrington, J, & Katsoulacos, Y. (2012). ‘Recent Advances in the Analysis of Competition Policy and Regulation’. Massachusetts: Edward Elgar Publishing.
Jeffers, P, & Nault, B. (2011). ‘Why Competition from a Multi-Channel E-Tailer Does Not Always Benefit Consumers*’. Decision Sciences. 42, 1, pp. 69-91.
Niels, G, & van Dijk, R. (2008). ‘Competition Policy: What Are the Costs and Benefits of Measuring Its Costs and Benefits?’. De Economist. 156, 4, pp. 349-364.
