The Role of Government: Fostering Competition
Competition is the situation in which two or more suppliers of a product are rivals in the pursuit of the same customers. The theoretical ideal is pure competition, in which no single firm or group of firms in an industry is large enough to influence prices and thereby distort the workings of the free-market system. In practice, however, pure competition works better in some industries than in others. Compare the dry-cleaning business with the auto industry. The nature of dry cleaning is such that small, independent firms operating on a local level are efficient. This is not the case in the auto industry, in which large manufacturers are favored by economies of scale (cost efficiencies made possible by making or buying large quantities of an item).
If you set out to sell a product or service in a free-market society, chances are that someone else will be trying to sell something similar. Most of the competition in advanced free-market economies is monopolistic competition, in which a large number of sellers (none of which dominates the market) offer products that can be distinguished from competing products in at least some small way.
When an industry (such as the auto industry) is dominated by just a few producers, it is called an oligopoly. Although oligopolies themselves are not illegal, the government has the power to prevent combinations of firms that would reduce competition and lead to oligopolistic conditions in an industry. For example, in 1997 the government opposed the $4 billion merger of Staples and Office Depot, asserting that the combination would substantially impair competition and force consumers to pay higher prices for office supplies. However, months earlier the government allowed Boeing, the world’s largest commercial aircraft maker, to purchase McDonnell Douglas, the world’s largest military aircraft maker, because the two served different markets.
Reference
If you set out to sell a product or service in a free-market society, chances are that someone else will be trying to sell something similar. Most of the competition in advanced free-market economies is monopolistic competition, in which a large number of sellers (none of which dominates the market) offer products that can be distinguished from competing products in at least some small way.
When an industry (such as the auto industry) is dominated by just a few producers, it is called an oligopoly. Although oligopolies themselves are not illegal, the government has the power to prevent combinations of firms that would reduce competition and lead to oligopolistic conditions in an industry. For example, in 1997 the government opposed the $4 billion merger of Staples and Office Depot, asserting that the combination would substantially impair competition and force consumers to pay higher prices for office supplies. However, months earlier the government allowed Boeing, the world’s largest commercial aircraft maker, to purchase McDonnell Douglas, the world’s largest military aircraft maker, because the two served different markets.
Reference
- Michael H. Mescon, Courtland L. Bovée, John V. Thill, Business Today, 9th edition, Prentice Hall, 1999
