# Competition (economy)

Four fast food restaurants next to each other

In economics, competition refers to the striving of at least two actors ( economic subjects ) towards a goal, whereby the higher degree of goal achievement of one actor causes a lower degree of goal achievement of the other.

Competition requires at least one actor with an inferior degree of target achievement and thus works against certain social principles such as equality , as it requires a privileged position of those who have achieved the higher degree of target achievement.

The differentiation between competition as a sporting comparison ( English competition ) and competition as a dispute-suppressing comparison ( English rivalry ) is arbitrary and has developed in business as a derivation from competition law. Presumably the anarchic dispute component is the reason for this term use in a consensus-oriented society with detailed codified law. In the scientific and economic literature , especially in Anglo-Saxon literature, there is no such distinction. There is also no linguistic justification for this distinction. The linguistic variant competition in Austria has the same word meaning, the word component bet ( English bet ) in Germany is rather insignificant.

## Functionality

In economics, a distinction is made between various static and dynamic functions of competition:

The following are considered to be social (sociopolitical) functions of market economy competition:

• Freedom of action : The market participants should be able to act in the market without restrictions of competition. The freedom of action is intertwined with the
• Freedom of choice : Consumers have the choice between various offers and employees have the opportunity to change their job.

→ Freedom, promoted by competition, is a final goal of economic policy alongside prosperity.

• Control function: Functioning competition with a large number of competitors simultaneously prevents strong social and political positions of power.

## requirements

Markets are mostly subject to private or governmental restrictions of competition - for example in the presence of a cartel or monopoly . As conditions for effective competition therefore often be private property rights , economic freedom , freedom , freedom of contract , a functioning judiciary , a functioning price system , a functioning monetary system , market transparency and market openness viewed.

## Competition theory

### Classic-liberal competition ideas

According to the classic liberal economist Adam Smith , the selfish and rational striving of the individual competitor for maximum profit also leads to an increasing common good , since the market mechanism (the principle of the invisible hand ) leads to the cheapest supply of goods.

For the classical liberals there are two contrary forms of market: free competition and monopoly . In the market economy, the entrepreneur's goal is to maximize his profits . Low market entry and exit barriers are important for competition. If these prerequisites are met, monopoly profits are competitively safe, as they have a signal effect on potential suppliers. This creates competition between the increasing number of providers. In the competition for the deal one who wins the race, which makes the best offer, then the competitor that in rivalry for the deal, with exchange partners by granting more favorable terms in the action parameters ( price , quality , sales , etc.), each other's profits diminish. The prerequisite for competition with at least two providers are rules of the game that protect competition.

### Model by John Maurice Clark

The American economist John Maurice Clark understands competition to be a never-ending process that consists of advances by individual pioneering companies and persecution by so-called imitators , in which temporary positions of power of the pioneer are accepted , even desired, because this is the only way to achieve economic growth and technical progress to let.

### Evolutionary competition theory

A modern further development of the model of so-called dynamic competition (by Clark) can be found in the evolutionary competition theory of Wolfgang Kerber, which transfers the struggle for survival of evolution to the competitive relationship. (To do this, she combines the elements of variation and selection from the thought model of evolution with the assumption of incomplete knowledge, as follows :) The providers test what the customers like with each product, they choose between the providers (selection) and "reward" by buying the provider with the best offer. The only option left for the competing supplier, which is left behind, is to change his offer (variation) by lowering the price or improving the quality or trying in some other way to win the favor of the customer. This “knowledge-generating process of competition” increases the knowledge of the providers about the preferences of the customers and the needs of the customers are (in the best case) better satisfied. This theory has two advantages: As one of the few competition theories, it not only considers the supplier side - as is the danger with price theory and game theory - but also integrates the competitive process into the supplier-customer relationship. In addition, this theory can also be applied in practical competition policy, namely in merger control of the EU Commission.

### Competition as structuring the risk according to Luhmann

Niklas Luhmann sees the benefit of economic competition in the fact that it can structure risks. If a complex system of the economy creates a lack of transparency and risk, and a lack of information to deal with this situation rationally, then the observation of competitors would remain as a practicable way of dealing with risks.

This thesis is also a warning where there is only competition between a few market participants. Because if the competition is not diverse enough, there is a risk that the strategies of the competitors will be similar.

Even with a large number of competitors, the requirement of complexity can disappear if they are synchronized, for example through similar training, similar socialization or mutual comparison via fast-working means of communication and mass media, etc. The synchronization takes place even if competitors function in a similar way, Use software-supported decision-making processes.

A blatant and, in terms of the deadly consequences, not only anecdotal example of a failure of competition in the absence of diversity are games in which two competitors race their cars onto a cliff. Whoever brakes first loses. In Anglo-Saxon, single-minded is a positive term, but here it leads to the elimination of competition in a competitive situation that still exists. This is already the structure of the risk; Due to a lack of diversity in their thinking, the competitors no longer structure the risk themselves in a way that promotes their survival. In this situation, competition does not serve to structure the risk, but is the cause of the risk.

### Game theory

Game theory is dedicated to the mathematical modeling of competition . It enables the explanation of past competition events. As a prediction tool in competition, it can be used to determine the type of game in which a competition is taking place and which resources and strategies are best used in the type of game found.

## Economic costs and benefits of competition

Perfect competition

Benefit: In the market economy model, the pricing resulting from competition leads to the Pareto-optimal allocation of resources . If competition in the economy means that the consumer gets better products at lower prices, then it has a benefit for the consumer ( consumer surplus , welfare gain ).

One of the benefits of competition is that it can drive innovation and rapid adaptation to new circumstances. The former monopoly Bundespost allowed z. B. no cordless telephones, which were taken for granted in other countries. On the other hand, together with other European network operators, he contributed to the fact that the technology ( DECT ) for cordless telephones was more reliable and interference-free than in countries with simple analog systems. In the case of DSL, on the other hand, competition from private companies meant that telephone lines could transmit data rates that exceeded the performance of ISDN by orders of magnitude.

Costs: Competition can also have an uneconomical effect, namely if competing suppliers or buyers are unable to stop a negative cycle on their own ( market failure ).

To answer the question of whether and how much competition or whether coordinated cooperation leads to the desired results, methods and findings from optimization calculations and game theory are used. In doing so, costs and benefits are compared. Economic convictions also play an important role in the assessment.

## Restraints of competition and competition policy

The egoistic interest of the market players in achieving a position with a strong market position ( market power ) results in the risk of competition restrictions . In order to prevent them, the state implements a competition-oriented competition policy through a number of authorities .

In economics, one speaks of a restraint of competition when the price and quality of one's own performance are not subject to the discipline of a market rival. There is then only limited competition. Restriction of competition can be due to market power or an explicit coordination ( cartel ) or imitation in an oligopoly .

There are both state restrictions on competition (e.g. tariffs , non-tariff trade barriers or state monopolies ) and private restrictions on competition (behavior coordination, concentration and abuse of competition).

The competition policy is an area of economic policy . It describes state rules and interventions with the aim of preventing the economically or socially harmful effects of cartels and other restraints of competition .

## Competition law

Competition law is the comprehensive generic term for the right to combat unfair competition (classic competition law in the narrower sense) and the right against restrictions of competition ( antitrust law ).

## Intensity of competition

In general, competition intensity is understood to mean the degree of mutual dependence ( interdependence ) between competitors. One possible specification of the intensity of competition can be to determine the speed with which a competitor's lead can be caught up. Important models for analyzing the intensity of competition come from Alfred E. Ott, Almarin Phillips, Erhard Kantzenbach and Michael E. Porter .

Porter describes five "driving forces of competition" (five forces), on which the intensity of the competition depends:

1. Competitors within the industry,
2. Potential new competitors
3. Market power of suppliers,
4. Market power of customers,
5. Replacement products that make your own product / service superfluous.

The measurement of the industry rivalry or the market power of individual providers is a major challenge for both practitioners and antitrust authorities. The starting point for determining market power is the consideration of the providers' market shares in the relevant market .

The simplest measure is the so-called. Concentration ratio (concentration ratio CR). The concentration rate is determined from the market share of the n largest companies. Usually n is between one and five; In other words, the market shares of up to five of the largest providers are added up. This is shortened with CR N from.

The use of the concentration rate can be found in German antitrust law. Accordingly, there is a dominant market position (Section 18 (4) or (6) GWB), if

The value of CR 1 is more than 40%,

The value of CR 2 or CR 3 is more than 50%,

· The value of CR 4 or CR 5 is more than two thirds.

A further development is the Herfindahl-Hirschman Index (HHI) , which is calculated from the sum of the squared market shares of all companies:

${\ displaystyle HHI = \ sum _ {1} ^ {n} s_ {i} ^ {2}}$  .

with s i = market share of company i in percent.

Using the HHI, markets can be divided into three categories in the competitive analysis:

Minor market concentration (HHI <1000),

Moderate market concentration (1000 ≤ HHI ≤ 1800),

· High concentration (HHI> 1800).

Intensity of competition for smartphones

Many competition authorities (Federal Cartel Office, Federal Trade Commission in the USA etc.) base their recommendations for takeovers / mergers on the HHI. In an M&A deal that involves moderately concentrated markets, serious competition concerns will be raised if the combination causes the HHI to increase by more than 100 points. In highly concentrated markets, an increase of 50 points is sufficient to conclude that there has been a threatening change in market power. If the degree of concentration or the increase in market share are below the aforementioned thresholds, it is unlikely that the competition authorities will take action against planned takeovers or mergers.

Example: In 2007 Nokia had a dominant position in the market for smartphones with around 50% market share. The other manufacturers such as BlackBerry or HTC were comparatively small. The HHI index was accordingly around 2600 and signaled a high level of industry concentration. In the following years, however, Nokia's market shares fell dramatically - other manufacturers such as Apple or Samsung gained significant market shares. Overall, it is noticeable that the market shares within the industry do not remain constant. New competitors such as Xiaomi, Oppo or Huawei have quickly gained significant market shares in recent years. This indicates low barriers to market entry. Only Apple was able to keep its market share comparatively constant. Beyond the market structure, there must therefore be reasons that can explain Apple's sustainable success.

The classic indicators are only suitable to a limited extent for looking at industry rivalries. They give initial indications of the intensity of competition, but ignore the market result. A high level of industry rivalry can often be observed even with a few providers, so that no extraordinary returns can be achieved in the market.

## Competitive strategies and competitive advantages

### Competitive strategies

A competitive strategy (also competitive behavior) describes those behaviors of the market players that are appropriate to the competitive environment. The aim is to gain a competitive advantage . The behavior of the entrepreneurial competitors among one another is - even outside of the extremes - very different and often typical of the industry. In particular, competitive strategies are used, e.g. B. Displacement wars and "price wars". But a general (not agreed) standstill can also lead to cartel-like conditions. Cartels and other restraints of competition eliminate the competitive nature of the market by agreeing on conditions (not just prices). Also in marketing , i. H. In the case of the planned impact on the sales markets with the aim of achieving a unique selling proposition (USP), measures were taken that could be described as strategies to avoid competition (patent protection, territorial protection, exclusive distribution agreements, sales ties, etc.)

In practical business, there is usually only competition between a few market participants. In general, there are hardly more than five participants ( oligopoly ) in the selection of potential customers (evoked set) for the individual purchase process . Often "regular customers" do not compare at all due to their strong customer loyalty and only consider competitors if they are dissatisfied with their regular supplier ( imperfect market ).

On the demand side, competition always occurs when it is a scarce good (ie always in the normal economy). Competition on the demand side can e.g. B. be organized in (open or covert) auctions , or (for the price set by the provider, for example for a rental apartment ) through quick commitments.

While the classical competition theory aims at dividing the existing market among the market participants, the theory is now increasingly investigating under what conditions and with what means an endogenous growth of the existing market can be achieved. This can be achieved by shifting the focus of attention from the supply to the demand side. By examining the factors that create value for the buyer and the conscious combination of elements from different markets, new offers can be designed that open up new demand potential and thus override the classic zero-sum game (W. Chan Kim and Renée Maubeorgne: "Blue Ocean Strategy").

All market participants who offer goods and / or services strive to gain a competitive edge over the competition. These competitive advantages can be achieved through price advantages, but also through the special quality of the products or services. Depending on the focus in corporate policy or in competition policy considerations, a distinction is made between price competition and quality competition (performance competition), which of course can never be completely independent of one another. For example, adherence to deadlines , friendliness of the employees, reliability in promises, availability of goods, large selection , goodwill , etc. can represent advantages in quality competition and create high customer loyalty . If a product or a provider enjoys special trust with regard to some or many of these features, one speaks occasionally - not quite appropriately - of a strong brand , regardless of whether there is legal trademark protection.

In commercial management , the observation that retail companies often achieve a competitive advantage less through price and quality policy than through better information management plays a role . H. through more precise and faster information acquisition as well as through differentiated and targeted delivery of information, each aimed at its four markets (sales, procurement, competitive and internal markets). Trading companies therefore typically try to gain advantages from their specific information competition through market information policy (Schenk) . In hardly any other branch of the economy has the formation of independent trading companies into trading cooperations proved to be a competitive advantage. The purchasing associations and purchasing cooperatives that were initially founded became, over time, competitive marketing associations for retailers. Large parts of the specialist trade would hardly have remained competitive without professional, cooperative marketing strategies and tactics , which range from collective shopping to private labels and joint promotions to cooperative employee training . The standing trade associations of commerce and their member companies in a complex competitive relationship, namely simultaneously in interorganisationalem group competition and intraorganisationalem, interorganisationalem and organisationsexternem individual event.

Competitive advantages can basically be divided into three categories

2. Customer-oriented advantages allow a very quick adjustment to changed customer requirements
3. Technology-oriented advantages make it possible to offer the most technically advanced and mature products and communication processes.

## literature

• W. Chan Kim: Blue Ocean Strategy , Boston, 2005.
• W. Chan Kim, Renée Maubourgne: The blue ocean as a strategy: How to create new markets where there is no competition . Carl Hanser Verlag 2005, ISBN 978-3446402171 .
• Georg Simmel : Sociology of competition (1903), in: Ders .: Writings on sociology. Ed .: Heinz-Jürgen Dahme, Otthein Rammstedt. Frankfurt 1983, pp. 173-193.
• Bernd Woeckener (2011): Strategic Competition: An Introduction to Industrial Economics . 2. completely revised Edition 2011 (1st edition 2007), Springer, ISBN 978-3642199769 .