What Are the Advantages & Disadvantages of Economic Competition?

by Neil Kokemuller; Updated September 26, 2017

Competition is a driving force of the free enterprise system in the United States. Outside of monopolistic industries regulated by the government, companies in most industries must promote the value of their brands relative to competing providers. Dealing with economic competition has some positive and negative impacts on businesses.

Economic Competition Advantages

Competition drives innovation and quality. Open competition puts pressure on providers to constantly research, innovate and upgrade the quality of their products and services, according to Advanced Micro Devices. If businesses fail to identify emerging trends and changing preferences in the marketplace, competitors can capture market share. Perpetual focus on quality improvement benefits customers and drives industries forward.

It leads to collective learning. In some cases, the best way to learn is to watch other successful businesses perform. In fact, some companies employ second-mover strategies based on observing what first-mover companies do to succeed and trying to upgrade their offering.

It improves knowledge and customer emphasis: Customer service and relationships are a major element of 21st century competitive strategy. The fight for core customers in a given market causes companies to invest time and effort in research and in relationship management processes that strengthen loyal relationships.

Economic Competition Disadvantages

The playing field isn't level: Though clever business leaders find ways to leverage strengths and offset weaknesses, certain company traits inhibit performance against competitors. Small companies often struggle with more limited resources and a lack of bargaining power with vendors, for instance.

Market share is divided among many: A primary drawback of competition is the reality of sharing customers with other providers. With open competition, every provider has some level of market share, so it is virtually impossible for a single provider to earn 100 percent of what customers spend on specific products and services.

Negative advertising can hurt: Without competition, a business would have little concern about negative messages floating around in the public arena, assuming the company operates ethically. In highly competitive industries, though, it is fairly common for brands to duke it out in the court of public opinion by knocking traits of competitors, according to Ad Age.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.