Role of Competition in Supply Market
A competitive supply market is one in which a large numbers of suppliers compete with each other to satisfy the wants and needs of a large number of buyers. In a competitive market no player in the market can dictate how the market operates, the price of goods and services, and the quantities to be exchanged.
Competition plays the following roles in the supply market:
1. The Profit Motive
Players in a supply market compete freely with the aim of making profits. This provides an incentive for other firms to enter the market and compete for market gains.
2. High Demand
When demand of goods or services is higher than their supply, the buyers will compete for them. This will cause the prices of the goods or services to increase giving an incentive for the suppliers to increase their supply.
3. Rivalry
When the benefit of obtaining a good or service is high, there is clearly a need to be competitive to secure it before stocks diminish.
4. Exclusion
Fair market competition ensures that suppliers exclude certain buyers from gaining the benefit that comes from consumption if they are unable or unwilling to pay for the goods and services.
5. Rejection
Fair market competition also allows buyers to reject goods and services if they do not want or need them.
6. Pricing
Competition enables both the buyers and suppliers to negotiate prices that will ensure continuity of the supply market. Either party is free to accept or reject the prices.
7. Adequate Information
For supply markets to work effectively there needs to be adequate information influencing the decisions of buyers and suppliers. Free markets do not work effectively when there are significant gaps in knowledge.
8. Timely Deliveries
Market competition ensures that when buyers order for a good or service, the suppliers make it available immediately or within the agreed period of time.
9. No Externalities
Fair market competition works effectively when parties not involved in the market transaction are not allowed to get involved in the operations of the supply market.
10. Property Rights
Competition gives incentive to buyers and suppliers to
obtain property rights for their goods and services. This protects the ownership of the goods or services from misuse and damage.