The Impact of Competitive Markets | Social Studies
How does competition in different markets affect prices of goods and services? This is an important question to answer as it is a high emphasis topic on the TASC Test Assessing Secondary Completion™. Before we dive in, let’s define what a competitive market is.
A competitive market is one in which a large amount of producers compete with each other to meet the needs and desires of a large consumer base, according to Economics Online.
Take the cell phone industry, for example. Cell phone companies bombard us with TV commercials, radio broadcasts, and billboard ads all the time. They want our business. Because the cell phone industry has a large amount of producers (like Verizon, Sprint, T-Mobile, AT&T, Cricket Wireless, etc.) that compete to meet the mobile communication needs of the country’s population, it is a competitive market.
Is a competitive market a good thing?
According to the Overseas Development Institute’s study on the economic impact of
competition, markets with more competition – more companies, more dynamic market entry and exit, and more intense rivalry for customers – tend to deliver better market outcomes.
While cell phone commercials, broadcasts, and ads may be annoying to sit through on a consistent basis, we (as customers) constantly receive price promotions, discounts, and special offers. Thus, competitive markets provide lower prices and better access to services.
On the flip side, if there is only one producer of a good or service (a non-competitive market), and there is demand for the good or service, the producer can charge a high price. Once another producer enters the market, competition for customers begins and prices may drop. For example, if the new producer enters the market and charges less for the good or service than the original producer, they will get most of the business. This will cause a price war until each producer is pricing and producing around the same price point.
Read more about competitive markets and how they’re formed at Economics Online.