Competition is inherent in marketplaces, and some people are in favor of a free market, while others are more in favor of regulation and central control, where the government provides a service instead of leaving it up to the market. Both approaches have upsides and downsides. Let’s explore some of them in this article!

Introduction
Competition occurs when there are multiple producers who are offering a similar product, service or solution, and consumers are able to choose freely between which producer they want to transact with. This isn’t inherently a good or a bad thing, but many of the dynamics that result from this phenomenon are perceived as good or bad by various groups. Let’s take some examples.

Monopoly

If there is only room for one pool in an entire town, then the producer (the person selling the tickets to enter the pool) has what is called a monopoly over the pool tickets. They can charge whatever they like, as much as possible, and the other people in the town who want to swim (the consumers) have the choice of either paying or not swimming. Note that they don’t actually consume the pool water. It’s just an economic phrase.

Competitive prices

On the other hand, if there are several pools in a city, then the producers fight over the consumers (the people who want to swim) by lowering the prices of their tickets. They all have to compete with each other to attract consumers, and so they are all trying to offer the most affordable tickets. The consumers are the ones who end up with the benefit: they can choose which pool to go to, and the producers have to compete to provide a better service for them.

So, in this way, competition is good for consumers, because it lowers their costs.

Race to the bottom

However, there are other ways in which competition can be perceived as a bad thing. For example, if there are too many producers of a certain product, then competition can be so intense that so much time, effort, energy and human potential is spent on trying to beat the competition, that the price of the products of every single one of the producers (who are still in business) has to go up, to account for the marketing spend, the special packaging, and other non-value-generating efforts that the producers have to go to, in order to compete with an equivalent product. So, the consumers are hurt, in that the prices of the product will be set higher then necessary, because of the competition between the producers. This leads to consumers having to pay higher prices, which is a bad thing.

Competing to the death

In addition, if there are many producers, then the producers have to fight over the consumers by offering the lowest prices. They keep lowering them until they are as low as possible, or even below their own costs. This leads to a situation known as a ‘price war’, which is another bad thing, because the producers can end up going bankrupt, and all those consumers actually have to work somewhere, so they are ultimately hurt if they have to lose their jobs for a period. Ultimately, it’s true that they’re all still human beings, whether they’re wearing the hat of “consumer” or “producer” at any given moment.

Better outcomes

Let’s take an example of how competition helps consumers. Mainly it encourages producers not only to reduce their prices, but also to make better products and offer better services. Let’s take the example problem of a consumer with bugs in their house. They want the bugs gone as soon as possible, and also as cheaply as possible. One very old company might produce a cheap bug spray that isn’t highly effective, and so the consumer has that choice. If competition is allowed, then a new company may come along, with a better product, and attempt to compete. The consumer might opt for the best indoor gnat trap on the market, with the highest price. The consumer now has that choice too. In this way, competition encourages producers to create, invent, and innovate better products and services. Ultimately, the consumer benefits from this kind of competition.

Oversupply

However, there are other kinds of business where competition does not help. In these kinds of industries, competition can be a very bad thing. It can encourage the producers to offer low prices, but not necessarily better products. In fact, the producers can hide the fact that their products are not good by offering them at a low price. Take for example, the industry of residential roofing. These days, in some places, there are so many companies that offer this service, that the competition is fierce. Companies are offering lower and lower prices, and the consumer has the illusion of getting a good deal. However, many of the companies can’t deliver a good quality roof, and so the consumer has to spend more money on repairs for the roof, so that the roof functions correctly. This is a good example of how competition can hurt the consumer, because the consumer is ultimately the one who ends up having to pay more in the long run.

In addition, competition can hurt the producers as well. There are many examples of companies that can’t compete in a certain industry, and so they go out of business. This is a bad thing for the producers, since they can no longer produce their products, or provide their services. This means that they are out of work, and it also means that they have to find a new job, which can be hard to do. It’s a bad situation for the producers.

Conclusion

Drawing together the pros and cons of the above, we can conclude that some balance is needed. However, looking at the situation with a wide angle lens, it seems that the countries that have very heavy regulation and no competition are in trouble, and also, the countries with absolutely no-holds-barred competition and no regulation are also in trouble. So it’s a balance, somewhere in the middle lies the sweet spot that is optimal for both producers and consumers.