What is a Competitive Market?

We all have been to the market. In fact, some of us explore the streets of the market every day. Markets serve the various needs of the society, from getting groceries to managing your wardrobe. 

 

Everything is related to the market in one way or another, though there are many things we purchase, but we hardly give much time to ourselves to think about them.

 

For consideration, do you ever think about what made your favorite fashion store your favorite outfit. Or, what decides the number of articles of the same kind to be produced. Or, what maintains the gap between the demand and supply force of the market. Well, all these attributes are linked with the competition in the market.

 

In this blog, we will understand the concept of a competitive market, its types, characteristics and examples.

 

 

What is a Competitive Market?

 

A competitive market is a usual market that responds to the customers’ demands for goods and services. Competitive market as the name suggests creates competition in the market. The main purpose of creating competition in the market is to attract customers and create the worth of the businesses.

 

The competitive market helps the business to evaluate production costs, pricing structure, product quantity and product quality. It is based on the concept of perfect competition. It works to benefit the producer and consumer equally. It works in the way that neither one consumer or one producer can rule the market.

 

A competitive market is defined as the market that has numerous producers. These producers compete with one another in scope to provide quality goods and services. They research about the needs and hopes of consumers, and try to be better and more worthy than their other competitors. In simple words, the market is not ruled by the single producer.

 

Similarly, no single consumer can rule the market either. The prices and quantity of goods are concerned and controlled by this mechanism. The entire group of consumers and producers decide the quantity and price of market commodities.

 

Features of a Competitive Market

 

1. It is a structure that responds to the supply and demand of the market and fluctuates the supply chain accordingly. No single buyer or seller has the power to influence the market. A competitive market makes a producer willing to sell his product according to the market price and buyers to purchase at the same price.

 

2. It has power to fluctuate the supply curve according to the demand and supply chain and adjust the producer’s cost relative to its sales. 

 

Summing up, in a perfect competitive market, multiple factors influence the market price and market supply. Producers are hence termed as ‘price takers’ who accept the market price, else it might cost the sales loss.

 

3. Let us consider an easy example of a competitive market. Farming, the basic necessity of livelihood. There are several farmers across the country and no one can decide the market price depending upon the amount of crop they can grow. 

 

Farmers can only grow the crop but can’t determine the price to sell it. They have to accept the prices decided by market supply.

 

Also Read | Guide to Perfect and Imperfect Competition

 

 

What is the Purpose of a Competitive Market?

 

The basic purpose of a competitive market is to curate an ideal condition. An ideal condition is where both consumers and producers can benefit from one another. It controls a relatively small number of buyers and sellers in relation to the overall market size. At the same time, competitive market offers:

 

1. Similar Products

 

A competitive market provides consumers with different options for similar products. Consumers can replace one product with another. This may even change the product price even with a small amount and may cause reduction in the sales.

 

2. Remove Entry Barriers

 

Unlike oligopoly and monopoly markets, a competitive market is open for everyone. If you have any idea and innovation you can make it into business and earn profits.

 

 

Characteristics of Competitive Market

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Characteristics of a Competitive Market

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 There are unique characteristics of Competitive markets which make them different from other markets. The basic feature of a competitive market is to ensure the continuous demand and supply in the entire market. 

 

If any businesses consider changing the price of the market, it first analyzes the competition in the market, and then transforms insights into strategies. Here are the ten basic characteristics of competitive market:

 

1. Focus on Profit

 

Profit, the basic necessity of business. Every individual or organization runs a business to earn money. When a firm tries to make a profit in the market, it gives them an incentive to go ahead in the market. 

 

When a company realizes that the market is able to pay the price it wants, it will enter in the market motivating others to startup. For example, someone will start a cloth selling business in the market only when the market is able to pay profits.

 

2. Diminishing Supply

 

Diminishing supply means supply declines after a time. As more products will be purchased from the sellers, there will be less stocks available. Diminished supply allows the company to increase the price and increase the production too. 

 

For example, if an individual buys a red car, there will be fewer red cars in the market, this will make producers raise the cost of red cars because now they know consumers can pay more for the remaining red cars.

 

3. Consumer Rivalry

 

A competitive market also creates competition among the customers. In simple words, a consumer competes with another consumer to buy a good or service. This rivalry arises specially for diminished stock. For example, we all remember how customers fight before IPL sessions to grab IPL tickets before anyone else.

 

4. Exclusion or Inclusion

 

Exclusion or inclusion, both are the characteristics of a competitive market. A competitive market works in a way that both customers and business can set parameters for purchasing behavior.  

 

Competitive market also poses the risk of limiting access to a product or service. For example, if a business makes any of its products available online, this causes the consumers to exclude the same products from the store shoppers.

 

5. Healthy Margins

 

Healthy margins in competitive market ability to charge the price. Business can avail profits when the cost of goods is less than its actual selling price. Competitive markets allow the business to make strict as well as ideal margins. 

 

For example, if you ever go to a picnic with your family, you will have to pay at different points like souvenirs and food. The price of these goods will definitely be more than the external market but according to the spot people will pay for it.

 

6. Informative for the Customers

 

Other important characteristics of a competitive market ensures that their customers have every information they need to know before purchasing a good. Once the customers know the details about the product, it will help them in better decision making. 

 

Details of products give consumers a right for product satisfaction, function or cost. For example, a consumer visits the same hotel for dinner every time, because according to their experience coffee is good and worth the cost.

 

7. Fewer Time Delays

 

Companies enjoy the benefit when a consumer purchases a product and enjoys the advantage in the right way. Indulgence in business may prompt the buyer to refer the service to his other acquaintances. 

 

For example, if you ordered a pizza, you got it delivered on time and found the taste worth the price, then obviously you would suggest the same to your friends.

 

8. Reduce External Influence

 

An external influence may have positive or negative cost effects on the market. Below given are the two examples of external influences:

 

• Positive external influences: If a pizza restaurant opens near the movie theater, the movie theater will have a positive effect on the pizza business.

 

• Negative external influences: The same pizza restaurant will affect the theater snack shops in a negative way by luring their customers.

 

 

9. Protection of Property Rights

 

Property rights act as a shield to the company's assets. It prevents them from further theft or damage. It set up boundaries of exploitation. For example, a small business collects mushrooms and sells them to farmer’s markets. Since there are no restrictions in the forest, this may cause extra exploitation of the farm and land.

 

 

10. Elevated Entrepreneurial Opportunity

 

Competitive market calculates the risks and opportunities of the market. For that the businesses may launch a competitive product or services. These opportunities may include:

 

• Consumers paying the price set.
• Businesses making profits.
• Companies earning revenue.
• The consumption charges.

 

 

Other Types of Market

 

Competitive markets are the basic existing market. Other types of markets that exist in globe or has been ever introduced in history are as follows:

 

1. Oligopoly

 

Oligopoly is the market that consists of only a few sellers. As the number of sellers are really few in the oligopolistic market, thus, each seller has to supply a large portion of products in the market. 

 

As the cost of entering into oligopoly is high, very few people actually enter the market. The major companies in oligopolistic market usually include large-scale enterprises such as an automobile and airline companies

 

2. Monopoly

 

Monopoly is another type of market that is exactly the opposite of a competitive market. Monopoly lies on the opposite end of the perfect spectrum. There is no competition in the monopolistic market. And, none of them can control the demand and supply of the market. 

 

Examples of natural monopolies include public utilities, gas suppliers and electricity. Monopolistic market tends to serve the customers even when it is not cost effective. The margins of profit and loss are quite low or poor in a monopolistic market.

 

From all above points and validation, it is clear that a competitive market is an essential thing for economic growth. A competitive market provides fertile soil in which entrepreneurs can flourish. Just imagine a market which is either oligopolistic or monopolistic. It won’t give any chances to new and young minded entrepreneurs. 

 

A competitive market allows the entrepreneurs to take risks, innovate and create new products. While entrepreneurs enjoy the benefit of monetary compensation, the entire nation enjoys the fruits of economic and wealth creation. Thus, a competitive market is an essential element of a market economy.