In this age of technology, the market place is full of variegated goods and service. It is also very important to note the significance of the factors and relationship of demand and supply. The factors of demand and supply keep the market alive and competitive. For example, consider the market structure and shape of gasoline and water. If the gas station, near your workplace or residence raises the price of the gas by few bucks, then you may prefer to change the gas station and start filling gas from other gas station of another company.
Now consider the case of water supplier. If the water supplier raises the charges by few bucks, then people may prefer to lower down the amount of water that they give to the lawns and may prefer to use water efficient shower, but it is difficult for them to switch and move towards another supplier. This situation of two markets reveals that a lot depends on the phenomena of demand and supply. It is possible for consumers of gas to switch the gasoline supplier because there are many suppliers in the market of gasoline. On the contrary, the consumers of water cannot switch and move towards another supplier because there are not many suppliers of water. The availability of suppliers and the type of the good that these suppliers offer to the consumers create a different type of competition in the market. These different types of competition include perfect competition, monopolistic competition and oligopolistic competition. The main objective of this paper is to discuss all these different type of competition in great detail.
The Concept of Competition in Economy
Adam Smith in the Wealth of Nations highlights two aspects of competition. These two aspects of competition of Adam Smith are as follows (Smith, 2009):
The greater or lesser intensity has an influence on the price, it contributes to lower profits.
The growth of capital by increasing competition must necessarily reduce the profits.
In the words of George Stigler on behalf of classical economists the definition of competition can be summarized as follows:
"Every owner of a productive resource will seek to use it in an area where he hoped that the ROI (return on investment) will be the highest. This result in competition, with each resource will be distributed in all sectors so that the rate of return (or profit) will be the same everywhere” (Stigler, 1989). The classical economists did not quite concern with a precise definition of competition because then the cases of monopolies were very rare.
In a nutshell, we can say that, economic competition is a situation of open confrontation between supply and demand in a market. Competition promotes continuous adaptation between supply and demand and the phenomenon of innovation. From the perspective of neoclassical economists, competition can be analyzed through the context of perfect competition. Thus, it can be said that the competition is a situation in which economic agents have the freedom to provide goods and services in the market, and choose who ...