Competition: essence, forms, methods of competition

The interaction between supply and demand and the functioning of the price mechanism occur in the market in conditions of competition between buyers and between sellers. Competition (translated from Latin means “to converge”, “to collide”) is an economic rivalry, the competitiveness of isolated commodity producers and consumers for obtaining maximum income. A. Smith figuratively called this process the “invisible hand” of the market, thanks to which the egoistic motives of individuals to obtain their own economic benefit turn to the benefit of the whole society, serve the progressive movement of the economy.

In the broad sense of the word, the concept of “competition” is used in economic science as an element of the market mechanism that ensures the interaction of market economy entities in the process of production, purchase and sale of goods, as well as in the field of capital application. In a narrower sense, the concept of “competition” is used as rivalry within the industry, as a rivalry of individual firms of different industries or individual producers for more favorable economic conditions, for obtaining maximum profit. In this regard, the following types of competition are distinguished (Table. 8.1.).

The important role of competition in the mechanism of functioning of the market is determined by the functions that it must perform.

First, competition must ensure the assertion of consumer sovereignty, as well as the implementation of the optimal combination and efficient use of factors of production. In other words, competition should ensure the adaptation of production to changed conditions, i.e. to the preferred interests of consumers and to new methods of production. This is the adaptive function of competition.

Secondly, competition should ensure such development that the desire of enterprises to obtain maximum profits contributes to technological progress, i.e. competition performs the function of ensuring progress.

Third, competition performs the function of distribution. It should create conditions where the distribution of income from production factors is carried out depending on their productivity. Such distribution is the best basis for stimulating an increase in production efficiency and thereby ensures the maximum growth in the volume of products produced, i.e. the volume of supply.

Table 8.1.

Types of competition




Indoor – industry

Making super profits

Increasing labor productivity, reducing the individual value of goods

Reduction of individual values of goods to a single, social value and the formation on this basis of the sectoral market price of goods


Getting the most profit

Free spillover from industry to industry in pursuit of an external rate of return

Equalization of various rates of profit into a single, average rate of profit and the formation of average profit as its absolute value


Protection of the interests of buyers and sellers (setting the highest or lowest prices)

Dynamics of the ratio of supply and demand of goods

Establishment of the supply price or the demand price, which leads to the formation of a balanced price

Fourth, along with the listed economic functions, focused on increasing the efficiency of production and increasing welfare, competition also performs the function of ensuring freedom of activity. The fact is that in the market system, the activity and the possibilities of choosing market participants are subject to restrictions, but competition implies, on the one hand, the availability of an alternative for any activity, on the other hand, it opens up freedom of action for the subjects of market relations.

Taking into account the conditions in which competition takes place, there are two main forms of competition: perfect and imperfect, which has several models (Table. 8.2.).

Table 8.2.

Main characteristics of forms and models of competition

Forms and models of competition

Signs that determine the form and model of competition

Degree of price control

Perfect (free, unlimited)

a large number of small sellers and buyers; complete homogeneity of the products produced, the buyer can choose any seller to make a purchase; no restrictions on cross-sectoral capital transfer, i.e. complete freedom of “entry” into the industry, into the market and “exit”; complete information about the price, demand and supply of goods, i.e. perfect knowledge of the market by consumers and producers

lack of control;

the price is set in accordance with the operation of the laws of supply and demand

Imperfect (limited)

Her models are:


limited by the influence of monopolies and the state; the goods are produced by only one manufacturer (firm), so there is a single seller (monopolist); the product sold is unique, there are no close substitutes for the goods, so the buyer is forced to pay the price set by the monopolist (or refuse to buy this product); for potential competitors, the monopolist sets up intractable barriers

sellers and buyers can influence the market price;

full control

Monopolistic competition

a relatively large number of manufacturers offering similar, but not identical (from the point of view of buyers) products; products can be differentiated by the conditions of after-sales service, by the intensity of advertising, etc. many sellers and buyers who make transactions not at one market price, but in a wide range of prices; relatively unlimited penetration of new competitors into the market, entry into the industry is quite simple

rather weak control;

limited by the possibility of replacing the goods


The prevailing model in the modern market structure:

the market consists of a small number of sellers (mainly large firms); goods may be similar, and may be differentiated; penetration into the industry, this market is quite difficult for new applicants; each seller reacts sensitively to the strategy and actions of competitors; price leadership policies are used, and collusion between oligopolistic firms is possible in order to maintain prices  and maximize profits

partial control

It should be noted that the range of methods that can be used by competing firms is quite wide. These methods can be divided into price and non-price. Price prices include: the use of monopolistically high or monopolistically low prices in order to displace a competitor and conquer the sales market; the use of price discrimination, especially in the provision of services (doctors, lawyers, hoteliers, transportation of perishable products), etc.

The main methods of competition in modern assumptions are non-price, i.e. competition is carried out by increasing the technical level of products, the quality of goods, improving the range while maintaining approximately the same price. These methods include advertising, service services, sale on credit, leasing, benefits to regular customers, the use of trademarks and trademarks of firms.

Unfortunately, sometimes forceful methods of competition are used (depriving a competitor of raw materials, markets, buying patents, seizing labor markets), as well as methods prohibited by law (arson, murder of dangerous competitors, economic espionage, bribery and blackmail, dissemination of knowingly false information about competitors, forgery of trademarks, etc.).

At the same time, the use of various methods of competition will not bring success, will not make competition civilized and effective, if the economic center of society – the state – does not take measures to ensure normal conditions for the functioning and protection from monopolism, the strengthening of which negatively affects the development of a market economy. The implementation of competition policy and regulation of monopolies by the state is manifested in the formation and improvement of antimonopoly regulation, including antimonopoly control over monopolized markets, an organizational mechanism (support for small businesses, simplification of the licensing mechanism, liberalization of markets, etc.) and antimonopoly legislation.