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ELEMENT 2.2
Competition promotes the efficient use of resources and provides the incentive for innovative
improvements.
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inefficient producers. Firms that fail to provide consumers with quality goods at attractive
prices will experience losses and eventually be driven out of business. Successful competitors
have to outperform rival firms. They may do so through a variety of methods, including quality
of product, style, service, convenience of location, advertising, and price, but they must
consistently offer consumers at least as much value relative to cost as is available from rivals.
What keeps McDonald’s, Carrefour, Amazon, General Motors, or any other business
firm from raising prices, selling shoddy products, and providing lousy service? Competition
provides the answer. If McDonald’s fails to provide a tasty sandwich at an attractive price
delivered with a smile, people will turn to Burger King, Wendy’s, Subway, Taco Bell, and
other rivals. Even the largest firms will lose business to small upstarts that find ways to provide
consumers with better products at lower prices. Firms as large as Fiat, Toyota, General Motors,
and Ford will lose customers to Honda, Hyundai, Volkswagen, and other automobile
manufacturers if they fall even a step behind in providing the type of vehicle people want at
competitive prices.
Video:
Walmart Competition and Cost Control
Competition gives firms a strong incentive to develop better products and discover
lower-cost methods of production. Because technology and prices change constantly, no one
knows precisely what products consumers will want next or which production techniques will
minimize costs per unit. Competition helps discover the answer. Is marketing
(?)
through social
media the greatest retail idea since the shopping mall? Or is it simply another dream that will
eventually turn to vapor? Competition will provide the answer, which will differ across
markets and change over time.
In a market economy, entrepreneurs are free to innovate. They need only the support of
investors (often including themselves) willing to put up the necessary funds. The approval of
central planners, a legislative majority, or business rivals is not required. Nonetheless,
competition holds entrepreneurs and the investors who support them accountable because their
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ideas must face a “reality check” imposed by consumers. If consumers value the innovation
enough to cover its costs, the new business will profit and prosper. But if consumers find that
the new product is worth less than it costs, the business will suffer losses and fail. Consumers
are the ultimate judge and jury of business innovation and performance.
When new products are introduced, they typically follow a predictable price-quality
pattern. Initially, new products are generally very expensive and purchased by relatively few
consumers, mostly those with high incomes. These consumers will pay dearly for the earlier
availability because during this initial phase, the product quality tends to be lower than it will
be later as producers gain experience, while the price will be high due to limited production
volume. These initial purchasers play a vital role: They provide the revenue to cover the
product’s start-up cost and make it possible for entrepreneurs to acquire the experience that
will help them improve quality and reduce per-unit cost in the future. Moreover, market
incentives will encourage them to do so. With time, entrepreneurs will figure out how to make
the product more affordable and expand its availability to more and more consumers.
Cellular phones illustrate this price/quality pattern. When cell phones were initially
introduced in the late 1980s, they sold for around $4,000, were about the size of a brick, and
could not do much of anything other than make phone calls. With time, their size was reduced,
their information processing power and functions expanded, and their price declined. Today,
they are available at a fraction of the initial price and they are viewed as a necessity by many
consumers in all income brackets.
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