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How The Competitive Environment Affects Business: Examples & Importance

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  • 0:04 Market Competition Defined
  • 0:38 Perfect Competition v.…
  • 2:03 Rules
  • 2:47 Strategy
  • 4:08 Benefits of Competition
  • 4:33 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Competition is essential for the successful operation of a market economy. Competition helps provide the best products and services at the best price. In this lesson, you'll learn about competition and some strategies employed by competitors.

Market Competition Defined

Meet Calvin. He's a freshly minted college student with a degree in computer science. He has an idea for a killer app that he thinks will blow away the competition and make him a fortune. Instead of getting a job, he decides to start a business and compete in the marketplace with his new app. Calvin is engaging in market competition. Market competition occurs when multiple businesses or individuals compete in selling goods and services in the marketplace.

Perfect Competition vs. Imperfect Competition

Competition can be perfect or imperfect. Perfect competition occurs when there are numerous businesses and no business has market power. All goods or services offered by a seller and its competitors are, essentially, indistinguishable to consumers.

When confronted with perfect competition, the only strategy a seller can employ is price-cutting. If the only difference between two products is the price, the consumer will pick the cheaper product. So, a seller in a perfectly competitive market may try to win by offering his product at the lowest price. An example of a perfectly competitive market is the commodities market. A barrel of crude oil is a barrel of crude oil; the only possible objective factor that may cause a consumer to purchase from one supplier over the other is the price per barrel.

Calvin's app market is characterized by imperfect competition, where there are fewer competitors and each business has the ability to differentiate its product or service in a way other than by price. Smart phones are a good example. Consequently, Calvin will be able to utilize some strategies in hopes of capturing a greater share of the market.

Rules

Market competition is like war, and the goal is complete domination. Calvin wants to capture the entire market. The only problem is that all of his competitors want the same thing. And just like modern warfare, there are some clearly established rules of engagement.

Governments, even in the most free of free market economies, establish lines that businesses cannot cross. Examples include consumer protection laws against fraud and false advertising and intellectual property laws that prevent a business from ripping off another business' intellectual property, such as patents, copyrights and trademarks.

Strategy

Calvin can utilize several different strategies to defeat his competition. Calvin will have a competitive advantage if two conditions are met:

  1. Potential customers perceive a difference between his app and the apps of his competitors.
  2. The perceived difference is important to potential customers, resulting in their selection of Calvin's app.

Calvin can use different strategies to gain a competitive advantage. Calvin can become a cost leader, which means he does it cheaper than his competitors. If he can produce his app cheaper, then he can earn more profit per app sold.

Calvin can also try to differentiate through perceived consumer value. If his app is perceived by consumers to be of greater value than the competitor apps, he will have a competitive advantage. One way to do this is by being innovative to meet more of his potential customers' needs and wants.

Finally, instead of trying to conquer the world, he may just try to dominate a small patch of it. In other words, Calvin can develop his app for a niche market, which means focusing on a small group of customers who have the same preferences and address the needs of this group that are not being addressed by his competitors.

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