The role of competition in a market economy is difficult to overestimate. Thanks to this process, a particular industry is developing, manufacturers improve the quality of their goods in order to attract the maximum number of customers. Competition also has a positive effect on consumers. But with all the advantages of this process, there are also disadvantages. Competition forces weak start-up companies to leave the market, while strong ones, on the contrary, only strengthen their positions. In addition, instability appears. The functions of competition in a market economy are designed to improve the process, and to reduce the shortcomings.
What is competition?
The economic competition of producers for attracting the largest number of buyers, respectively, maximizing profit is called competition. The founder of economics Adam Smith called competition “the invisible hand” of the market. He said that thanks to this process, the desire of producers to maximize income also serves the good of society, as the goods become better.
Like many other terms, competition can be considered both broadly and narrowly. In a broader sense, competition is understood to be a part of the market mechanism that regulates and ensures the interaction between participants in the economy. In a narrow sense, this process is presented as a rivalry between individual companies for a “place in the sun”, a competition between firms in any industry. The functions of competition in a market economy determine the order of actions and goals that must be met.
Perfect competition
More broadly, two main types of competition can be distinguished: perfect and imperfect. Perfect competition is not divided into models, which cannot be said about imperfect. At first glance, it is perfect competition that is the ideal situation in the market. Its essence is that all manufacturers produce the same product that meets certain requirements.
A manufacturer can attract buyers only with the help of advertising moves, but the product itself cannot be changed. In reality, this type of competition is very difficult to find. An example is perhaps the farm of farmers who grow the same vegetables and fruits.
Monopoly
This direction is the most widely represented in the world at the moment. Monopoly is one of the models of imperfect competition. It represents an abundance of small firms that produce goods and offer their services. The essence and functions of competition in a market economy are most widely represented precisely in this form of this process. Indeed, in a monopoly, you can compete in almost all ways: change the price, product quality, advertise, create a new brand, etc.
There are many examples of such competition: it can be travel companies, beauty salons, and bookmakers. In each city there are various organizations that provide services or produce goods. These enterprises are representatives of the monopoly.
Oligopoly
This market has one distinctive feature: more than ten manufacturers should not function on it simultaneously. The functions of competition in a market economy are doomed to two outcomes: either they help companies agree on partnerships, or firms begin to outlive and oust each other.
The state in the conditions of an oligopoly monitors the price level so that manufacturers do not become impudent and do not set high prices for goods that are much cheaper. All companies that operate in this market are large and successful. It is almost impossible for new enterprises to take a seat next to them. Examples include mobile operators and the chemical industry.
Pure monopoly
This market differs from others in that there is only one manufacturer. The functions and place of competition in a market economy in this case mean nothing. If the manufacturer is only one, then he has no one to compete with, since he is a monopolist in a particular industry. The state should exercise control, since a monopoly firm can practically establish its own rules. In most cases, with a pure monopoly, no development of production occurs. Often, the same product has been produced for years and is not being improved. This leads to stagnation in the economy. From examples, water utilities and gas companies can be distinguished.
Competition features
First you need to highlight the general functions of competition in a market economy briefly. Then all this will be analyzed in more detail. So, firstly, this process should ensure the efficient use of production factors. In other words, it should help adapt modern production to new conditions.
Secondly, competition should help ensure that the main goal of any entrepreneur - maximizing profits - is combined with the development of technological progress. Thirdly, competition provides freedom of action. She offers the availability of alternatives for absolutely any activity.
Regulatory function
Now about each in more detail. Let's try to consider all the functions of competition in a market economy with examples. The market is based on the balance of supply and demand. The regulatory function helps to identify the volume of production that will satisfy the needs of the buyer.
To determine this, you need to draw a graph that will reflect the demand and quantity of products. There is an equilibrium point on the graph that reflects the right amount of product. For example, a company is engaged in dairy products. She produces 50 packages of milk and 20 cans of sour cream per day. If the company begins to produce 10 packs of milk less, there will be a shortage. And if 10 more, then there will be a surplus. Both that, and another negatively influences production, therefore this function is very important.
Innovation
No less important in the modern world is the innovative function. Nowadays, everything is changing very quickly, and improving production, acquiring the latest equipment is becoming a necessity. However, not all firms are willing to spend huge sums of money on various innovations. Although thanks to them, working conditions improve, the quality of products improves. The experience of other companies shows that it is necessary to apply all the functions of competition to a market economy. Examples can be varied, but dwell on one of them.
At the end of the 20th century, Nucor Steel, a steel casting company, was no different from its competitors. In 1986, the president of the company was able to obtain documents on the new technology. This development was incomplete, and its implementation required a huge amount of money, which the company did not have. However, the president took a chance, and now Nucor Steel is an industrial giant that has outpaced all competitors and has become a leader in the industry.
Distribution function
Like all other competition functions in a market economy, dispensing is very important. In other words, it is motivation. According to statistics, half of the companies cease to exist a year after their appearance. 65% leave within three years. This indicates a lack of knowledge and a low level of motivation. A company that aims to win customers will do everything possible for this. This company will use in its activities all the functions of competition in a market economy.
The plan also plays an important role. Planning your activities is necessary, as it helps to clearly identify all the stages of development of the company, and also determines the mission and purpose of the enterprise.
Control function
Control in a competitive environment should exist in the form of any bodies. In the markets of monopolies and oligopolies there is such a body - the Antimonopoly Committee. In the context of a pure monopoly, there is no controlling body, since this is not necessary. Many economists do not distinguish the control function, since no manufacturer will put the price higher than others with a poor-quality product, since this will lead to loss of customers and, consequently, bankruptcy of the enterprise. It is necessary to work on mistakes and improve the product in order to break into the leaders among similar firms.
