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Competition is the effort of multiple independent parties working against one another to achieve a goal.

As an economic term, competition refers to the rivalry between firms to sell the goods or services they provide. Economists generally consider the level of competition in an industry to be intrinsically related to that industry's market structure.

Competition provides incentives for firms to improve the quality of their products and/or find ways to cut costs and reduce prices. Firms compete both for investment capital and for customers. Those firms that fail to attract enough customers to remain profitable eventually go bankrupt, and their assets are acquired by others. For instance, in a Chapter 11 bankruptcy, the original stockholders, who failed to govern their firm in a profitable manner, are divested of their ownership in the firm, and the creditors take over ownership. In this way, competition tends to put society's productive resources in the hands of competent managers.

Individual members of society also compete for scarce resources. This is true whether an economy is structured along capitalist or socialist lines. Either way, wealth and power tend to be unequally distributed. The only difference is that in a capitalist system, people compete to serve customers, while in a socialist system, people compete to rise to political power. The qualities required to successfully compete in a capitalistic marketplace, such as creativity, innovation, sound business judgment, and a willingness to take well-advised risks, are in great contrast to those required to compete in a political marketplace, such as conformity, compliance, and an overly cautious approach that avoids trying anything that the person might be blamed for later. For this reason, capitalistic states tend to be more prosperous, and to have faster rates of technological advancements, than socialist states.

Some competition exists among governments, inasmuch as citizens can act as sovereign consumers, moving themselves and their capital to whatever countries they feel have favorable laws. This gives freer nations an advantage in competitions that may arise for military and economic supremacy. Albert Einstein and others fled from Nazi Germany to the United States, greatly aiding the U.S. war effort during World War II. During the Cold War, East Germany and other Soviet-bloc countries sought to seal their borders so as to prevent a brain drain of productive intellectuals fleeing to the West, where they would have more personal and economic freedom. Some countries have implemented tax harmonization as a means of preventing tax competition that would otherwise lead to governments competing to offer the lowest-tax business environment.

  • Who is your competition? The question seems so simple, but a company that defines its competitive set too narrowly can miss disruptive attackers and high-potential growth opportunities.[1]
  • American competitiveness depends on better-educated workers and a stronger incentive to succeed.[2]

See also