Page 153 - Encyclopedia of Business and Finance

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Competition

Types of competition

Perfect Monopolistic
Characteristics Competition Competition Oligopoly Monopoly
Number of competitors Many Few to many Very few No direct
competition

Ease of entry into or exit Easy Somewhat Difficult Regulated by U.S.
from industry difficult government
Similarity of goods/services Same Seemingly Similar or No directly
offered by competing firms different but different competing
may be quite products
similar
Individual firm's control over None (set by Some Some Considerable
price the market) (in true monopoly)
Little
(in regulated one)
Examples Farmer Fast-food Automotive Power company
restaurant manufacturer

Table 1

To determine an area where a company might have a com- ence, such as a longer warranty or a lower price, but often
petitive advantage, a SWOT analysis is often done to the difference is only perceived. Difference in perception
identify the company’s internal Strengths and Weaknesses is usually accomplished through advertising, the purpose
and the external Opportunities and Threats. A SWOT of which is to convince consumers that one company’s
analysis lets the company know in which area(s) it has a product is different from another company’s product.
competitive advantage so it can concentrate on those areas Common ways to differentiate a product or service
in the production and marketing of its product(s) or ser- include advertising a better-quality product, better ser-
vice(s). vice, better taste, or just a better image. Competitive dif-
In addition to staying on top of changing consumer ferentiation is used extensively in the monopolistic form
preferences, companies must constantly be looking for of competition, discussed below.
ways to cut costs and increase productivity. Companies
must provide consumers with the best-quality product at FORMS OF COMPETITION
the lowest cost while still making a profit if they are to be Although each form has many aspects, not all of which
successful competitors in the long run. One way to can be considered here, competition can generally be clas-
remain competitive is through the use of technology. sified into four main categories: perfect competition,
Technology can help speed up production processes monopolistic competition, oligopoly, and monopoly.
through the use of robots or production lines, move infor- (Table 1 summarizes the basic differences among these
mation more accurately and more quickly through the use four types of competition.)
of computer systems, and assist in research and develop-
ment proceedings. Perfect Competition. Perfect competition (also known as
Global competition has made gaining consumer pure competition exists when a large number of sellers
acceptance an even tougher challenge for most businesses. produce products or services that seem to be identical.
Firms in other countries may be able to produce products These types of businesses are typically run on a small scale,
and provide services at a lower cost than American busi- and participants have no control over the selling price of
nesses. In order to compete, American businesses must their product because no one seller is large enough to dic-
find other ways to win consumers. One way for businesses tate the price of the product. Instead, the price of the
to accomplish this is through competitive differentiation. product is set by the market. There are many competitors
Competitive differentiation occurs when a firm somehow in a perfect competition industry, and it is fairly easy to
differentiates its product or service from that of competi- enter or leave the industry. While there are no ideal exam-
tors. Competitive differentiation may be an actual differ- ples of perfect competition, agricultural products are con-

130 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION