We explain what free competition is in economics, its advantages and examples. Also, what conditions are necessary for it to exist.
What is free competition?
In economics, free competition It is the economic situation in which economic agents can apply the strategies they decide within the framework of the law, to maximize its profits, minimize its losses and win over the consuming public, without forces outside the market itself intervening in this. This condition is central to the existence of a free market economy, so much so that both terms are used synonymously.
Free competition, in that sense, It is contrary to market regulations, but also to the existence of monopolies. In fact, it is a concept that presupposes a transparent, honest market, in which consumers can inform themselves about the quality and value of products, and can openly choose from the available offer which brands and products to consume.
However, In the real world, economic actors do not always compete with each other on fair and neutral terms either because the State intervenes through restrictions, subsidies and tariff policies, or because some competitors act unfairly, controlling a sector of the market in their favor (monopolies or oligopolies). This economic competition is normally expressed in the prices of services and products.
According to those who defend the convenience of the free market, then, the forces of supply (of producers and marketers) and demand (of consumers) are the only ones that should intervene in the market, in such a way that a equilibrium situation understood as a perfect competition. On the other hand, detractors of the free market accuse it of leading to the concentration of wealth in a few hands and the predominance of strong economic actors over weak ones.
See also: Economic liberalism
Necessary conditions for free competition
For a situation of free competition or perfect competition to exist, the following conditions must be met:
- The State must allow economic actors to set their rates and sales strategies without favoritism, that is, without subsidies, restrictions, quotas, surcharges or taxes. For example, in certain countries the State subsidizes certain public services (usually through public companies) to keep their price low and accessible, which prevents viable competitors from existing in that market niche.
- The State, at the same time, must ensure that economic actors compete with each other in a fair, non-monopolistic manner that is, without having the power to impose disadvantageous situations on its competitors. For example, a large corporation may artificially lower the price of its products (dumping) for long enough to bankrupt its competitors, and thus take over the market and then impose whatever prices it wants.
- Consumers must know the quality and content of the products consumed so that you can freely choose between what is offered. Otherwise, your choice can always be manipulated. For example, a company may promote a product as if it were of better quality than it is, falsifying the information in its content to deceive the consumer and unfairly favor its business.
Importance of free competition
Free economic competition It is considered a key element for the establishment of a competitive market that is, an economy with a lot of activity and many different actors.
The explanation of this idea is that, through competition for the favor of consumers, economic actors are forced to make efforts and improve their offer of products and services which at the same time imposes a similar obligation on its competitors. Thus, through this positive feedback loop, a country's economy would grow and consumer conditions would improve.
Advantages of free competition
Among the advantages of free competition are the following:
- Promote innovation and the continuous improvement of the offer of economic actors.
- Improves the quality of life of consumers by increasing the quality of products and services.
- Stimulates economic activity and generates higher wealth indices.
Market failures
Just as free competition implies certain economic virtues, it also entails risks or market anomalies, which can prevent free competition or turn it into a situation of profound economic injustice, such as:
- State interventionist policies such as regulations, taxes, quotas, among others.
- Mafia or coercive management on the part of the large economic actors, to favor their share of competition and establish a monopoly or oligopoly.
- Loss of strategic control of basic services in the hands of private actors, which can influence politics and socially destabilize the country.
Examples of free competition
Some cases of free competition market are, for example:
- The regions of commercial exchange without restrictions established by free trade agreements, as is the case of the ANSA-China Free Trade Area between different countries in Southeast Asia and Micronesia.
- Free trade zones (“free ports”) established in specific regions of certain countries, in which the purchase and sale of products is allowed free of taxes and state restrictions. Such was the case, for example, of the island of Margarita, in Venezuela, until the beginning of the 21st century.
- The health market in the United States in which there are practically no public alternatives, but health centers act based on profit and capturing the largest possible market share.
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References
- “Free competition” in the Pan-Hispanic Dictionary of Legal Spanish of the Royal Spanish Academy.
- “Free market” on Wikipedia.
- “Free competition presupposes a transparent market” by Federico Gastón Thea in the Argentine Legal Information System (SAIJ).
- “What is free competition and why is it important?” (video) at the Business Generation Foundation.
- “Free competition” on the Official Website of the European Union.