A few weeks ago we talked about supply and demand, and how there is an ideal equilibrium between the two. This equilibrium exists because of competition in the marketplace. According to Investopedia, “Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Also, consumers have many substitutes if the good or service they wish to buy becomes too expensive or its quality begins to fall short. New firms can easily enter the market, generating additional competition. Companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum.”
Perfect competition doesn’t exist in reality, but in most industries companies are affected by other companies’ products and pricing. This is largely because each firm (and each individual) is primarily concerned for its own interests. Adam Smith describes this self-interest as an “invisible hand” in his book Wealth of Nations (available at Andersen Library). The concept of the invisible hand “[assumes] that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off” (Investopedia).
There are situations that undermine competition and the invisible hand. You may have heard people discuss types of imperfect competition, such as monopolies or oligopolies. Imperfect competition is often regulated by the government because it can be damaging to the economic well-being of a country. One example of such legislation is the Sherman Antitrust Act, passed in 1890 to limit monopolies. Recently, people have been debating whether or not the Comcast/Time Warner deal should be considered a monopoly because they are the two largest companies in their industry. The problem with monopolies is that they give one company significant power over the market, allowing them to inflate prices. Meanwhile, other companies are discouraged from entering the market. This undermines competition and can harm the economy.
If you’re interested in learning more about competition, listen to this podcast from Econ Lowdown.
Also, check out these books available at Andersen Library:
- The Antitrust Revolution: Economics, Competition, and Policy, edited by John E. Kwoka, Jr., Lawrence J. White. Call number: HD2795 .A64 1999, Main Collection (3rd floor)
- On Competition, by Michael E. Porter. Call number: HF1414 .P67 1998, Main Collection (3rd floor)