How does competition help to lower prices in the market for goods and services?

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Competition helps lower prices in several ways. The effects in the market for goods and services are closely related to production and other stages of distribution, so stimulus comes from competition in diverse sectors.

Overall, competition promotes lower prices, whereas in a monopoly, a single vendor has total control. An example is the comparison between generic and name-brand drugs. A single vendor can set the price as high as market will allow, but competition leads to varied pricing.

When there are multiple vendors, they compete to offer reduced prices in hopes of attracting customers. This is a primary reason that businesses that are trying to increase market share tend to lower their prices; the incentive to potential customers can win them away from the competitors. An initial reduction also tends to stimulate further reductions. Not all businesses can sustain the reduced prices over time, but once a lower price is consistently offered, it tends to become the standard. Not all vendors will consistently offer those prices, but different vendors will offer those prices at different times. By lowering prices even further, they undercut their competitors.

Demand for a given product or service can attract new businesses into that market sector, stimulating research and development efforts to create a highly similar product. The availability of new models generally decreases the price of the older versions.

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