Intensity of competition

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Under competition is meant in the economy , the measure of the speed with which projections of a competitor can be made up.

Model after A. Phillips

In 1962 Phillips developed a model with which he determined the intensity of competition. Philipps denies a clear relationship between the intensity of competition and the functionality of competition. To this end, Philipps established a competition intensity function that contains four decisive variables:

  • the formal rigor of inter-company cooperation. When it increases, the intensity of competition decreases.
  • the number of companies in the relevant market . The higher the number, the higher the competitive intensity.
  • the degree of inequality in power . The more unevenly the power is distributed, the less intense the competition.
  • the ability of others to behave independently in the market . The larger this number, the greater the intensity of competition.

Model after E. Kantzenbach

Kantzenbach's model was developed in the late 1960s. The concept is based on the insight that market imperfections are indispensable, since complete competition is hardly to be found in reality. In addition, these may even be desirable with regard to technical progress, since there is only an incentive for innovations if there is a deviation from the full competition (assumption of zero profit). It is therefore not about eliminating market imperfections, but about analyzing the relationship between:

  • Market structure (number of providers, relative and absolute size of companies, degree of market imperfections),
  • Market behavior (price strategies, market strategies , quality; market behavior can restrict competition) and
  • Market result (prices and profits achieved on the market; depending on the intensity of competition).

(also known as the SCP approach : structure, conduct, performance)

Central to the concept is that a causality is assumed between the market structure and the market result. Assuming this causality, the desired market result can be achieved by influencing the market structure. The market result depends on the intensity of competition. This in turn depends on two factors: the number of competitors and the degree of market imperfection.

The intensity of competition reflects the dynamics of the competitive process. This can be defined as the speed with which the innovative advantages of so-called pioneering companies are eliminated by imitating competitors. A distinction is made between:

  • the potential intensity of competition that would result if all competitors were to compete with one another; it rises as the number of providers falls, because if the number of providers is low, technical progress will penetrate the market more quickly. It is highest in the homogeneous duopoly.
  • the effective intensity of competition arises taking into account anti-competitive behavior. It increases up to a certain number of competitors (up to 4–6 competitors), until the potential competition intensity is reached. As the number of providers continues to rise, it falls again because the companies do not reach a sufficient size to produce innovations. Market transparency decreases and the market penetration of technical progress slows down.

According to Kantzenbach, the optimal level of competition is achieved in a wide oligopoly with moderate product differentiation. He assumes that competition is greatest with a medium number of providers. At the same time, the companies are big enough to invest in product and process innovations.

However, there is no definition of how the optimal size of an oligopoly can be determined. Another problem with Kantzenbach is narrowing it down to just two factors. State framework conditions, the inclination to rival and risk also play a role.

literature

  • Erhard Kantzenbach: The functionality of the competition , Göttingen 1966.
  • Almarin Phillips: Market structure, organization, and performance: an essay on price fixing and combinations in restraint of trade , Massachusetts 1962.