What Are the Advantages & Disadvantages of Economic Competition?

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Economic competition is a fact of life for any business. Even if you are the first in your field, it is just a matter of time before competitors come on board. Although it seems on the surface that economic competition leaves you with a smaller slice of the pie and a smaller share of your target market, economic competition can also benefit both businesses and customers.

Advantages for Businesses

Although economic competition forces lessen your market share, it can also force you to become a better business. It’s easy to coast when you’re the only option. If people eat at your restaurant mainly because you’re the most convenient choice, they'll support your business even if your food isn’t fantastic, as long as it is palatable and safe. But if another restaurant opens nearby, you’ll have to step up your game. Providing higher quality products allows you to take more pride in your work. If your food is good enough you may even draw customers from outside your neighborhood. And if enough high-quality restaurants move into your area, it may even become known as a food destination, increasing your customer base even further.

Disadvantages for Businesses

Competition decreases your market share and shrinks your customer base, especially if demand for your products or services is limited from the start. A competitive market can also force you to lower your prices to stay competitive, decreasing your return on each item you produce and sell. When too many businesses produce the same products, the market becomes flooded. As goods are overproduced, inventory piles up. When inventory reaches unsustainable levels, your company could have too much capital tied up in items that are just sitting on the shelf and not enough cash on hand for urgent expenses such as rent and payroll.

If inventory levels stay high over time, you could end up laying off workers because you don't need their production capabilities. Even if you avoid laying off staff, you may have to reduce their scheduled hours in order to keep payroll costs in line.

Advantages for Customers

It’s good to have choices. The more competitors there are trying to offer you food or personal hygiene products, the more options you’ll have. The competition in the market will force them to improve their offerings to better meet your needs. With more options available, you’re more likely to find something with features tailored to your specific situation. More competition also lowers prices, increasing your buying power.

Disadvantages for Customers

Because economic competition can be hard on businesses, it may harm companies you regularly support. If your favorite restaurant goes out of business because of too much competition, you’ll no longer be able to eat there. Having too many choices can also complicate purchasing decisions. You may not have that much of a preference about what features are in a tube of toothpaste, but find yourself standing in the toothpaste aisle having trouble making a decision because there are too many options. Free market competition can also lead to monopolies, with the biggest players dominating the market and ultimately leading to fewer, lower quality choices.

Economic competition is a fact of life for any business, but it's clearly not all good or bad for anyone. While competition can spur innovation and give consumers more choice, too much competition can be a disadvantage to smaller businesses, ultimately shrinking the options consumers have when they're only left with the biggest places to shop.

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About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.