COMPETITION

Market oriented societies focus on the use of competition to constrain individual behavior. In Western industrial societies, competition is regarded as the optimal way to coordinate economic behavior. A market exchange is a contract between a seller and a buyer. The seller competes to get the highest possible price (or best deal), while the buyer competes to by at the lowest possible price. The competition between the buyer and seller is influenced by the tastes (or preferences) of buyer and seller, information that each has and alternatives that each has. The word “competition” has at least two meanings in economics. One is to refer to rivalry. In rivalry, there is a winner and a loser. The other is a structural notion of “pure” competition where the sellers do not see themselves as rivals (farmers are often thought of as being engaged in highly competitive markets but do not see themselves as rivals.) Generally, societies use a mix of cooperation and competition. A firm is a form of cooperation. In 1937, Ronald Coase published an explanation of why business firms exist in a market economy (Coase, pp 33-55) If a competitive market economy were the optimal way of allocating resources, why would firms be desired? Coase argues that there are costs of using a market. He calls these costs “transaction cost.” There are also costs of creating and operating an organization. If the transaction costs exceed the cost of organizing a cooperative endeavor, a firm will be created to avoid the use of market transactions.