How does competition lead to lower prices?

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Competition is the bedrock of the free market economy. The idea of competition is connected to the supply-and-demand principle, which maintains that the consumer’s willingness to pay is the force that drives pricing. When there is no competition among vendors—in a monopoly—the prices can be set by the sole vendor, which is conducive to artificially high price levels. In contrast, a large number of vendors must constantly attend to the market conditions and price their goods accordingly.

The importance of competition is connected to the product involved. In regard to a commodity where there is no substantive difference among products, consumer behavior is more likely to be motivated by price. One example is gasoline. As the buyer is unlikely to have brand loyalty, they will purchase the lowest-price gas. Competition may accelerate at peak times, such as holidays, to attract buyers.

In considering everyday items, the balance between brand loyalty and price can generate lower prices among different vendors. The relationship between grocery stores and big-box stores offers an example. If a consumer is loyal to a brand for a necessary item, such as toilet paper, they are likely to be swayed by price more than the type of retailer. Large chains such as Walmart are likely to offer lower prices, which is advantageous to consumers. There can be a negative effect, however, when smaller businesses cannot afford to compete.

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