How does competition benefit the consumer?

  • Competition helps the customer in the following ways :

    1. When there is a competition among the sellers of the particular product it gives consumers the problem of choice. It gives consumers sufficient substitiutes to choose from.
    2. When there is competition among the producers/sellers it usually engages in price war in which the ultimate winner is the customer.They are able to acquire product at reasonable prices.The prime example of this can be telecom sector. Since the introduction of jio there has been a constant tussle between the service providers of which consumers are coming out victorious.
    3. When the sellers are engaged in competition sale of the product is the only way to survive in the market. In order to get the desired sales volume the sellers are forced to produce good quality product at a price prevalent in the market . All this ultimately assist the consumer in his purchase decisions. For instance: before the entry of savlon in the market dettol was the leader but with competition it had to make sure that it delivers on the quality that the customer expects or the customer will have the option of substitiute.
    4. The high degree of competition always keeps the producers/sellers on their toes in terms of evolvong technology. Technology used today can become obsolete tomorrow so the producers have to be aware of the changing trends in technology that are going around and how it can affecte its products. This tussle between the producers to provide their product equipped with latest technology helps the customer in geeting their hands on the latest technology at a competitive price. A prime example of this can be auto sector. With latest techology coming in almost a fortnight maybe in terms of engine performance or other performance parameter/s the customer seems to be the ultimate winner.
    5. In these times of cut-throat competition the role of features become as crucial as any other parameter. The companies have to provide latest feature in their product as it has the potential to influence the buying behaviour of customer. If the customer is heavily invested in the product the features offerd play a crucial role in generating intrest of the customer in the product . for instance if the customer is willing to buy a car then he will choose among the substitiutes in his price range. With competition he filters out the rivals which do not offer modern day features. The benefit of this is that the customer gets latest features at realatively low prices.

    Let us think about a situation where a large number of sellers `compete’ to provide a service. What are the benefits of competition? Consider a simple example: A set of people in a locality are willing to pay 200 Rs for a shirt when there are 50 shirts available in the market. On the other hand, they are willing to pay only 100 Rs per shirt when 100 shirts are available. (This is so since people may be willing to pay a higher price when only fewer units of a product are available.) Assume that the cost of making a shirt is 100 Rs. (This cost includes not only the cost of raw materials and labour but also managerial effort and the cost of capital.) What is an ideal situation? This is when shirts are sold at 100 Rs and when people buy 100 shirts. This is so since, at this point of transaction, people do not have to pay anything more than the actual cost of making a shirt. Or the production/supply takes place up to the point at which additional price that people are willing to pay for a shirt (or the marginal willingness to pay) just equals the additional cost of producing it (or the marginal cost).

    Let us see how competition leads to this situation. Assume that there are a number of suppliers selling shirts here. One seller may try to sell shirts at 200 Rs per piece so that she can make a profit of 100 Rs per shirt (This is so since people are willing to pay 200 Rs when 50 shirts are available in the market). Another supplier may try to sell it at 190 per piece. Then he can make a profit of 90 Rs here. Under this situation people may opt for the latter supplier and not the former. Yet another supplier or the first one then may attempt to charge 180 Rs (and intend to make a profit of 80 Rs per shirt) and people may shift to this supplier. This can go on until the price charged is just or a little above 100 Rs. When the price charged is only 100, people will demand more shirts, i.e. 100 (and not 50). This will be supplied since the making of a shirt costs only 100 Rs, and even by selling it at this price, one can recover all costs including the cost of capital and management. This is taken from my blog The Benefits of Competition and there are many such examples in Real Life Microeconomics

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    Competition sets the bar for pricing, quality, and service. One grocery store has cornered the market because it’s the only game in town. As such the consumer is stuck with the pricing and service they provide. As the town grows it draws the attention of a new grocery chain and they move into town and offer lower prices more variety and superior service. The original grocer must respond in kind or face losing customers. As the town continues to grow the population is now large enough to consist of two different shoppers. Those who seek out products that are representative of the very best and those who settle for good enough. Now an upscale grocer opens up with superior products, promotions, and personal service and higher prices because they have established themselves as the best and attract customers who will gladly pay more for something better while the rest of the population are well satisfied with good enough.

    The idea is that since everyone is competing for a set amount of real estate, the price of rent can just keep rising forever.

    And then property owners make more money.

    And if they swim around in enough money, some of it hopefully splashes around onto the consumers, and then it will benefit them.

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    It creates more options, so that the consumer can pick what works best *for them*. That doesn’t mean it’s best for everyone, nor even that any particular option is liked by enough people to be worth continuing to spend the resources used in making it. Companies compete on many aspects, price, quality, minor changes to the basic product or service, where it’s available, and many others. Which combination is best? That’s for the purchasers to decide.

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    The idea is supposed to be that competition forces business to offer better service or products at lower prices so that consumers have access. That is what happens to an extent but, more than anything, the market provides abundance at the cost of quality. There is a point at which lower prices will force the quality of a good or service down – this is inevitable. So, more people might have access to a version of the product but the lowest priced ones will be of poorer quality.

    Competition of companies/business give customers the ff:

    • better quality product/service
    • better value
    • better pricing
    • more beneficial products
    • possible improvement of lifestyle
    • etc…

    Companies must meet the consumers’ needs in order to make profits. The more companies that compete to do this, the more likely that one or more of them will succeed in meeting those needs. Companies compete on the bases of

    • price
    • quality
    • convenience

    Since individual customers differ on their perceptions of quality & convenience, we may have many companies in the marketplace succeeding, in different segments.

    They are introduced to variety. Competition produces different prices, options, and opportunity costs that will allow the consumer to choose based on their needs, wants, etc.

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