Is competition good or bad among firms? Why it is good or bad?

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Lorraine Caplan | College Teacher | (Level 1) Educator Emeritus

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Competition is generally good, for consumers and for companies, as long as it is lawful competition. There are some exceptions, though, particularly in the area of utilities. 

To understand this, first let's look at what happens when there is no competition at all, where one company makes all of a product.  If you have the only company in the world that produces refrigerators, you have no incentive to produce a particularly good refrigerator, and you have no incentive to keep the price of a refrigerator at a level at which people can afford to buy it. Sooner or later, you are likely to go out of business, first because you have not attended to quality, and second, because there will not be enough people who can afford your product to sustain your company. The principle of supply and demand does not function in a monopoly. 

On the other hand, if there are many producers of refrigerators, this will keep you on your toes. You have incentive to produce a better refrigerator, and you have incentive to keep your prices lower than your competition's. You are far more likely to succeed in business this way. In a competitive, capitalistic economy, the law of supply and demand does apply, such that some equilibrium can be achieved with competition. 

For the consumer, no competition means high prices and shoddy products.  People will be less inclined to buy anything more than they must, which is not going to keep any economy going.  People also might resort to other means, for example, doing their marketing daily to not have to buy a refrigerator at all.  Some goods are so price-sensitive that people will, in fact, do without. 

However, historically, and even now, in newly developing nations lacking much infrastructure, it is difficult to find investors to develop that infrastructure without guaranteeing a high return. Substantial sums must be invested, and a return on one's money can take decades.  This was the case in the United States with utility services, for example, gas, electricity, and water.  To attract investors, monopolies for these were granted by the government.  Then one company created the means of delivery for these utilities and with no competition, everyone had to use that company.  In more recent years, utilities have been deregulated by the government to some degree. While the means of delivery remains a monopoly, the provision of electricity or gas, for instance, is now competitive in some states. In theory, this should have caused prices to fall, but that has not always been the case. 

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