Competition

Competition is a situation in which two or more parties strive for something that all cannot obtain. In economics, this term has been vaguely used since early times. Adam Smith used the term to explain why a reduce supply of a certain good led to higher prices: “the supply become larger, the price would sink more, the greater the competition of the sellers.” In Adam Smith’s definition, only the number of participants is necessary to trigger competition: the greater the number of suppliers, the greater the intensity of competition. Although this definition is vague, it was not until the 19th century where the concept of competition became a subject of central interest in the economic science. The reason for this is the growth of large-scale enterprises (in transport and energy sectors) as well as the raise of public utilities which shape the industrial organization of those economies. Another reason is the use of mathematics in economic science that allows the development of abstract theories. One of the most influential theories is the concept of perfect competition. In markets under perfect competition firms have no power to set soaring prices (seeking to increase their rent), consumers buy all the goods supplied, and the social welfare attains its maximum level. It is noteworthy that competition, in the economic sense, is not only related with the theory of prices and the allocation of resources. It is also intrinsically related with the efficiency of the markets. According to Adam Smith, if each supplier individually maximizes the return from his own resources, then the aggregate output would be maximized. Other economists that contributed to this theorem were: Léon Walras, Alfred Marshall, Vilfredo Pareto, and Arthur Cecil Pigou. Adapted from Durlauf & Blume (2016).