Free competition

Free competition is an economic system in which the prices of products and services are regulated freely by forces of supply and demand and by patterns of consumer behavior. It is one of the basic characteristics of free market and the basic rule of capitalism.

Free market is usually compared against controlled or regulated market. Regulated market is an economic system in which the forces of supply and demand and other aspects of economy, such as who can enter the market, are controlled by the government (Tomasi, 2012).

Key concepts associated with free competition and free market

Supply and demand will be one of concepts where demand from the consumers says how much people are interested in a product or a service and how much are they willing to pay for it. Supply describes the availability of a product or a service and the prices that are set by businesses. In an ideal free market, those forces regulate themselves without any government intervention. Then there also is perfect competition which is a theory that describes ideal conditions of competition in free market. Those conditions include, amongst others:

• Equilibrium between quantity of all the products and services on the market and the quantity of those, demanded at the current price.
• Perfect information - everyone (both consumers and producers) knows all the prices of all the products and services on the market
• Rationality of consumers - buyers behave in a perfectly rational way when choosing where to allocate their money. Their only motivation is to increase their economic utility
• Low barriers to entry - it should be possible for a new producer to enter the market and be competitive (Röpke, 2012)

Criticism of free competition

The main criticism of the idea of free competition is that the ideal conditions required for a completely free market to work never occur in real life. Phenomena like monopoly, price fixing and irrational consumer behaviour are common problems in economy. In an actual world, government always has to regulate some aspects of economy (such as taxes, tariffs and laws) in order to keep the economic system from failure and recession (Baumol, 2002).

Examples of Free competition

• Price Discovery: Price discovery occurs when buyers and sellers interact in a free market and prices are determined by the forces of supply and demand. As buyers and sellers compete for goods or services, the price of the goods or services rises or falls depending on the relative strength of the two forces.
• Competition among producers: In a free market, producers compete to provide the best goods and services at the lowest prices. Producers may invest in new technology, develop innovative products and services, and use different strategies to gain a competitive advantage and attract more customers.
• Competition among sellers: In a free market, sellers also compete to offer the best prices to their customers. Sellers may use different marketing strategies, such as discounts and loyalty programs, to increase their sales and attract more customers.
• Consumer Choice: Consumers are free to choose from a variety of goods and services in a free market. Consumers can compare prices and products, and choose the one that best meets their needs and budget. As a result, consumers can benefit from low prices and a wide selection of products and services.

Advantages of Free competition

One of the main advantages of free competition is that it allows businesses to compete on price, quality, and innovation, leading to better products and services for consumers. Here are some other advantages of free competition:

• Lower prices: When businesses compete against one another, they often lower their prices in order to attract more customers. This can result in lower prices for consumers.
• Increased variety: With more competition, businesses are incentivized to innovate and develop new products to differentiate themselves from their competitors. This leads to an increase in variety and options for consumers.
• Higher quality: When businesses have to compete for customers, they are incentivized to increase the quality of their products and services in order to stand out from the competition. This can lead to higher quality products and services at a lower cost.
• Greater efficiency: Competition also encourages businesses to become more efficient in order to remain competitive. This leads to a more efficient use of resources and greater economies of scale, which can benefit both businesses and consumers.

Limitations of Free competition

Free competition has some limitations which prevent it from being an ideal system. These limitations include:

• Monopolies and oligopolies: In free competition, companies can easily become monopolies or oligopolies, where a few suppliers control the market. This can lead to higher prices and lower quality of services, as companies do not have to compete for customers.
• Lack of regulation: Free competition does not have any rules or regulations, which can lead to unethical practices such as price fixing and insider trading.
• Lack of competition: Free competition does not encourage new businesses to enter the market, as existing businesses can easily dominate the market and drive out potential competitors.
• Consumer exploitation: Free competition can lead to a situation where consumers are exploited by companies who are able to charge higher prices without competition.
• Market manipulation: Companies can use various tactics to manipulate the market, such as buying up a large amount of stock or land to control prices and limit competition.

Other approaches related to Free competition

Free competition is an economic system in which the prices of products and services are regulated freely by forces of supply and demand and by patterns of consumer behavior. It is one of the basic characteristics of free market and the basic rule of capitalism. Other approaches related to free competition include:

• Price Discrimination: Price discrimination is the practice of charging different prices for the same product or service to different customers, depending on the customer's willingness to pay. It is an effective way to increase profits, as it allows businesses to cater to different customer segments.
• Monopoly: A monopoly is a market structure in which a single firm has exclusive control over the supply of a certain product or service. This allows the firm to set prices higher than what would be set in a competitive market.
• Government Regulation: Government regulation of markets is used to ensure fair competition, protect consumers and promote economic stability. Regulations can include price controls, restrictions on market entry and limits on the activities of firms.

In conclusion, free competition is an important feature of a free market economy, however, other approaches such as price discrimination, monopoly and government regulation are also often employed to ensure a fair and efficient market.

Free competition — recommended articles

Price-Taker — Monopoly — Monopson — Factors affecting pricing — Market structure — Bargaining power of buyers — Production concept — Competition — Clientele effect

References

• Ayal, E. B., & Karras, G. (1998). Components of economic freedom and growth: An empirical study, The Journal of Developing Areas, 32(3), 327-338.
• Baumol, W. J. (2002). The free-market innovation machine: Analyzing the growth miracle of capitalism, Princeton university press.
• Lea, S. E., Lea, S. E., Lea, S., Lea, S. E., Tarpy, R. M., & Webley, P. M. (1987). The individual in the economy: A textbook of economic psychology, CUP Archive.
• Ravenhill, J. (Ed.). (2017). Global political economy, Oxford University Press.
• Röpke, W. (2014). A humane economy: the social framework of the free market, Open Road Media.
• Tomasi, J. (2012). Free market fairness, Princeton University Press.

Author: Mateusz Wójcik