A competitive environment is the dynamic external system in which a business competes and functions. The more sellers of a similar product or service, the more competitive the environment is. So many markets in the United States are flooded with firms, making them extremely competitive.
Competitive environments fuel creativity and productivity, generating higher quality work and innovation. When someone wants to win, he is more likely to look at a variety of solutions to a problem. He will have to push boundaries and experiment with solutions. This usually yields better systems and processes and creates an efficient work ethic that improves the system.
When other companies provide similar products or services as your company, you are in a competitive business environment. Competition in a business environment is not necessarily bad. Most companies face some extent of competition. Although it comes with some disadvantages like decreased sales and potential loss of investors, there are some significant advantages.
Note there is really no better way to motivate a company than having competition. Industries with more competition typically have more innovation and product evolution because each company tries to outdo the last. The competition for sales among businesses is a vital part of the United States economic system.
In market economies, there are a variety of different market systems that exist, depending on the industry and the companies within that industry. It is always very imperative for business owners to understand what type of market environment they are operating in when making pricing and production decisions, or when determining whether to enter or leave a particular industry.
Various Types of Competitive Environment in Business
Economists have identified four types of competitive environment—perfect competition, monopolistic competition, oligopoly, and monopoly. These competitive environments are further explained below.
Perfect Competitive Environment
Perfect competition exists when there are many consumers buying a standardized product from numerous small businesses. Since no seller is big enough or influential enough to affect price, sellers and buyers accept the going price.
For instance, when a commercial fisher brings his fish to the local market, he has little control over the price he gets and must accept the going market price. In a market characterized by perfect competition, price is determined through the mechanisms of supply and demand.
Prices are influenced both by the supply of products from sellers and by the demand for products by buyers. With so many market players, it is impossible for any one participant to alter the prevailing price in the market. If they attempt to do so, buyers and sellers have infinite alternatives to pursue.
In monopolistic competition, just like we had under perfect competition, there are many sellers too. However, here they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose.
Note that products can be differentiated in a number of ways, including quality, style, and convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? Then, some buyers would be forced to switch from one to the other.
Therefore, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily). How is product differentiation achieved? Most often, it’s simply geographical; you probably buy groceries at the shop closest to your home regardless of the brand.
At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. However, irrespective of customer loyalty to a product, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.
Oligopoly simply means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. Also, since the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is always quite minimal.
Note that companies in oligopolistic industries include such large – scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies always tend to have a certain level of control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive.
In the United States, we always tend to see this practice in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors more or less come up with similar promotions.
A monopoly is the exact opposite form of market system as perfect competition. In perfect competition, there are many small companies, none of which can control prices; they instead accept the market price proposed by supply and demand.
In a monopoly, nonetheless, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country. Note there are few monopolies in the United States because the government limits them.
Most fall into one of two categories: natural and legal. Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises need huge investments, and it would be unattainable to duplicate the products that they provide.
These practices inhibit competition, but they are legal because they are important to society. In exchange for the right to conduct business without competition, they are regulated. For example, these businesses can’t charge whatever prices they want, but they are expected to adhere to government – controlled prices.
As a rule, they are required to serve all customers, even if doing so isn’t cost efficient. A legal monopoly always tends to arise when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years.
Note that within this period, other companies are not allowed to use the invented product or process without permission from the patent holder. Patents also allow companies a certain period to recover the heavy costs of researching and developing products and technologies.
A good example of a company that enjoyed a patent – based legal monopoly is Polaroid, which for years held exclusive ownership of instant – film technology. This company priced the product high enough to recoup, over time, the high cost of bringing it to market. Note that without competition, in other words, it enjoyed a monopolistic position in regard to pricing.
One purpose of an economy is to provide people with goods and services—cars, computers, video games, houses, rock concerts, fast food, amusement parks. Without competition, businesses don’t last very long, if at all. Despite the laundry list of disadvantages, there are some significant advantages to competition.