Impact of Competition Among Sellers and Buyers on the Price, Quantity and Quality of goods.
Impact of Competition on Price, Quantity and Quality
Throughout human history, markets have always existed, and the exchange of goods and services was regular. With the establishment of economics as a critical social science discipline, there is a better comprehensive and conclusive understanding of market dynamics. The supply and demand forces in the market determine the prices. Technology also plays a significant role in determining the level of demand and supply in the market and the conditions under which people will operate in the market transactions. Furthermore, at some point, the market can be saturated with virtually similar buyers and sellers, for instance, a market of ballpoint pens. On the other extreme, the market can be characterized by a single buyer and sellers.
In the world of economics, there is always competition. Excessive profits, supply, and current demand gets eliminated through competition between the suppliers in the market. Besides, competition applies a downward force on the costs, minimizes the slack periods, and offers an efficient production process. Also, the concept of price taking infers that no supplier has control of the market. It means that there is no firm that can assign price profitability beyond the existing marginal cost of production. Similarly, their consumer surplus is maximized.
On the other hand, consumers also compete in the market. The producers notice an increase in demand for a product in the market, and therefore they set the prices for the consumers. Therefore, the producer gets an opportunity to increase his or her income. The increasing competition among sellers leads to a decreased price. Hence, the cycle of increasing and decreasing prices due to market forces continues and never ends. People will always want high-quality products at unbeatable prices. This paper seeks to critically analyze how competition among sellers and buyers affects the prices, quality, and quantity of goods and services in the market.
Impact on Price
Markets occur whenever sellers and buyers intermingle. The interaction regulates the prices and also distributes the scarce services and goods. Whenever there is competition in the market the prices are determined by selling or buying decisions by both sellers and buyers respectively. To determine the impact of competition on prices in the market a relative price is used. A relative price refers to a particular price of a single good or a service equated to other services and goods. Furthermore, the equilibrium price also referred to as market clearing price of a service or a good is the price at which there is an equal demand and supply forces.
i) Fluctuations in the Price System
The buyers or sellers usually get incentives or signals of the market situation from the prices. Anytime demand and supply is altered the market prices adjust and consequently affects the incentives. In most cases, higher prices of goods and services in the market gives incentives to the buyers to purchase low volumes while the producers will try to make and sell more. On the other hand, lower prices means that many buyers will rush to buy high volumes of goods while the producers will tend to make less products or sell smaller volumes.
Critically, any increase in the price level of a good or a service encourages more people to seek for alternatives hence leading to a decrease in demand. Also, a decrease in prices leads to high demand for goods and services. The two unique patterns are laconically called the law of demand which exists as long as all other factors influencing demand are kept constant (Klingensmith, 2019). Also, the demand of a product fluctuates whenever there are changes in the income level of the consumers. The demand can be determined also by the prices of other related goods and services or the number of customers in the market.
Additionally, any alteration in prices of the productive resources equally dictates the supply level of products in the market. Besides, the type of technology at production level and the number of sellers in the market determine the supplies. Hence, any change in demand and supply affects the relative prices to also change. Therefore, sellers and buyers have to adjust their decisions in buying and selling.
ii) The role of competition in price fluctuations
Price levels drop with increased competition among the sellers which encourages the producers to yield more of what the customers are ready to buy. On the other hand, competition between the buyers results into an increase in the price level which in turn allocates the services or goods to only the willing and capable buyers. Conversely, competition between sellers creates low prices and costs but better product quality and improved customer services. Competition level in the market is determined by the number of consumers and suppliers. Besides, the barriers to entry and exit in the market determine the competition level. To reduce the level of competition in the market there has to be collusion between the sellers and buyers. However, collusion is usually very challenging in large competitive markets. Also, introduction of a new product and improved production techniques by the entrepreneurs is a type of competition and is a key source of technological, economic growth, and price adjustment.
Impact on Quantity
Competition between sellers and buyers in the marketplace is beneficial for consumers and the business. For most countries, competition from numerous organizations and people through free enterprise and open markets is the foundation of the economy. When companies compete with each other, consumers are able to get the best quantities of products and services. Antitrust laws support businesses to compete so that both consumers and businesses can benefit. The most important effect of the competition is to boost innovation and quantity of products. Competition among businesses can spur the improvement on the quantity of goods and more effective processes (Belleflamme, 2016). Companies might compete to be the first to market a new or different product; however, the company with the competitive advantage ought to have better prices, quantity, and quality. Furthermore, this helps to influence economic growth and improve living standards.
Additionally, competition among sellers usually leads to better product quantities since competing companies want to have the best prices, quantity, and quality of products in order to attract more consumers. The buyer looks for the lowest price of a product but with good quantity. If the competition is high, numerous companies offer better quantities to their products for lower prices. For instance, an oil company in competition can increase the quantity of oil they park in their bottles. If they typically park 850ml for fifty dollars, they can start parking one 950ml for the same price. The more a company does this, the more profits they make; however, the quantity of a product should not be increased so much to cause losses for the business. The competition cycle between sellers and buyers will never end since people are constantly battling for consumers and what sellers have. As long as there are buyers and sellers, the quantity of goods will continue to improve due to the demands and needs of consumers.
Competition among buyers is equally essential and intense as competition between sellers, and the effect of this competition on the quantity of goods is also similar. Buyers lining up in a store to get products or goods is an example of competition between buyers. Some people get injuries trying to get into these stores. Another instance of competition between buyers is when sellers are purchasing supplies or materials from the same supplier. Hence the supplier ought to improve the quantity of products for better sales (Belleflamme, 2019). Furthermore, competition between sellers majorly positively impacts a product since it entails having the best prices, quantities, and qualities. When one competitor improves the quantity of their products, other businesses will also have to improve their quantities in order to remain competitive in the market. If they fail to do so, buyers will go to other companies with improved quantities causing losses for companies with insufficient quantities and profits for companies with improved quantities.
Competition between buyers affects the quantity of goods by the demand and desires they have. Supply and demand impact everything that involves buying and selling products. Moreover, if the demand for a product rises, the prices go up, and people demand better quantities for their products since they have paid a handful (Steinbaum, 2020). However, if the demand for a product lowers, then the product’s price reduces, and the quantity increases since the seller want to attract consumers to purchase the products. Still, everything spins around supply and demand.
Impact on Quality
Economic theory cannot conclusively explain the impact of competition on quality. However, the effect of competition on quality truly depends on the situation. Sometimes increasing competition does not necessarily increase the quality as expected. In some exclusive cases, quality is decreased, which might give rise to serious safety or health issues (Ezrachi, 2015). Nevertheless, what the customer wants is synonymous with the expected quality of a product in the market. The quality of the product is generally relative, and the only determinant is the consumer, who can assess it and give an opinion. Thus, any high-quality product is in line with the client’s demand and needs. Also, the customer’s judgment is the advantage a product will get and is referred to as perceived quality. It is a form of satisfaction derived from vision but cannot be expressly termed merely vision because perceptions and expectations are also included.
Similarly, in any competitive market, the quality of service determines the sales volume and level of productivity. The higher the quality of products, the higher the value for customers, which translates to significant sales. As the sellers are competing, there is high product differentiation which means the customers need knowledge in making worthwhile decisions. The consumers learn that some products provide higher value compared to others in the market.
Competition between sellers usually results in improved quality of products available for consumers. However, this is not always the case in every market. Sometimes an increase in competitive pressure reduces the quality of products or services (Ezrachi, 2015). For example, some airlines have exerted pressure on their pilots to lower fuel consumption costs during flights secretly. Reportedly, these pilots carry the legally minimum permitted amount of fuel sometimes, and as they hit thunderstones or get delays, they have to seek emergency landing services to refill. The quality of services is reduced in the event passengers experience delays for lack of enough fuel.
The increased competition among sellers can lead to a compromising situation. However, to meet the demand, they have to incur more cost of production and mostly whenever the prices reach the marginal cost. On the other end, when buyers experience high levels of satisfaction for certain goods and services in the market, it increases demand. That is because high-quality products enhance the value of the products to the consumers. Thus, the increased demand means that the prices will rise. However, there is high efficiency when the consumers get low prices and high-quality products simultaneously. In most markets, quality is a critical point for the business to succeed in the industry.
Concisely, it is essential to understand that producers in the competitive market enjoy an increase in prices because it helps them cover higher per-unit costs and get profits; hence, the quantity supplied increases and vice versa. Besides, the level of competition in the market is determined through relative prices, and the prices fluctuate based on the market forces of demand and supply. Similarly, high levels of competition in the market are usually characterized by significant product differentiation. Thus, as the suppliers try to dominate the market, there is an improved quality of goods and services, which the consumers heavily benefit and enjoy the advantage. Besides, competition positively impacts the quantity and quality of goods in the market. That is because an increased number of products means the prices are low, which attracts customers. Conversely, it is crucial to understand that increased competition does not necessarily mean improved quality. That is because some firms might tend to try as much as possible to unilaterally reduce quality to absorb pressure if it is the easiest way to deal with the pressures of the fierce market contest.
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Belleflamme, P., & Toulemonde, E. (2016). Who benefits from increased competition among sellers on B2C platforms?. Research in Economics, 70(4), 741-751.
Ezrachi, A., and Stucke, M. (2015). The curious case of competition and quality. Oxford University Press’s Academic Insights for the Thinking World. Oxford University Press. Retrieved from https://blog.oup.com/2015/07/competition-quality-law/
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Steinbaum, M., & Stucke, M. E. (2020). The Effective Competition Standard. The University of Chicago Law Review, 87(2), 595-623.