Business, Legal & Accounting Glossary

Definition: Competition


Full Definition of Competition

Competition in economics is a healthy rivalry that exists between sellers or firms to offer any type of commodity or economic service. Under competition, an economy is assumed to have several firms. These firms continuously strive to hold a greater portion of the market. This phenomenon in economics is termed as competition.

Competition was a common occurrence between merchants in foreign trade in ancient times. Classical economists of the 19th century studied this competition between two merchants and regarded it as a natural phenomenon that can occur within a free market where supply and demand exist simultaneously. Degree of competition depends on the number of sellers or buyers existing in an economy.

Types of Competition

Perfect Competition

Perfect competition in economics is referred to as a situation in which firms have no control over the prices of a commodity. There exists no market power in the hands of sellers or buyers. This type of competition hardly exists in reality as it is based on some assumptions as follows:

  • A large number of firms- It is assumed that there are a large number of sellers and buyers in an economy
  • Products are homogeneous- All products produced by the firms are homogeneous
  • Free entry and exit of firms- Firms can freely enter or leave the market
  • Full information of the product exists- Buyers have full information about the commodity available in market

Participants in perfect competition can earn a profit. However, the profit earned is normal profit. Firms can make only that much money, which is required to cover the economic costs. In this type of competition, a consumer improves his utility without worsening the utility of other consumers.

Monopolistic Competition

Monopolistic competition is a situation where market features characteristics of both perfect competition and monopoly. Monopolistic competition is a common market form prevailing in an economy. To obtain monopolistic competition, there are few assumptions:

  • A large number of buyers and sellers exists in an economy
  • All firms produce similar but not substitutable products
  • Firms can enjoy free entry and exist
  • Firms can influence the prices of commodities.

Cite Term

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Page URL
Modern Language Association (MLA):
Competition. Payroll & Accounting Heaven Ltd.
August 16, 2022
Chicago Manual of Style (CMS):
Competition. Payroll & Accounting Heaven Ltd. (accessed: August 16, 2022).
American Psychological Association (APA):
Competition. Retrieved August 16, 2022
, from website:

Definition Sources

Definitions for Competition are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 29th March, 2020 | 0 Views.