Competition Theory

Subject: Economics
Type: Synthesis Essay
Pages: 4
Word count: 1102
Topics: Capitalism, Microeconomics

While competition entails contention among sellers in an attempt to increase market share, profits and sales volume, it is accepted as an essential condition for the coordination of different interests in the market process. In competition, consumer sovereignty is promoted by the producer. The producer or seller does so for economic gains (Hill et al., 2017). Conventionally, competition has been understood as the process where sellers and producers bid against each other to offer goods and services to the market. However, competition also entails competitively bid by buyers to purchase specific quantities of goods or services that are available, or may be available, should sellers offer such goods or services (Foster, 2014). The competitive process is significant in the market economy because it exerts pressure that tends to direct resources from the producer to competitively willing buyers. Accordingly, competition not only enables efficient distribution of resources for the entire economy but enhance the effectiveness of the resources that are in the market (Tisdell, 2013). Correspondingly, competition leads to more innovation, more production, high standards of living and lower costs. Competition is reduced when externalities such as oligopoly or monopoly occur and enhanced when the market is perfectly competitive. In perfect competition, sellers and buyers have no ability to set prices, but utilize the price as given by market forces (Hill et al., 2017). Four market structures define competition. They include monopolistic competition, perfect competition, and oligopoly and monopoly competition.

Monopoly competition occurs in the market constituting of only one producer or a seller in that the buyers have no other preferable alternatives (Hirschey & Bentzen, 2016). Alcoa is a good example of a company that exhibits monopoly competition. Alcoa (Aluminum Company of America) deals with the production of aluminum (Bumas, 2015). Alcoa exhibit natural monopoly. The company produces alumina and aluminum for the automotive, packaging, construction, aerospace and other markets. A natural monopoly is a type of monopoly that may arise as a result of large-scale infrastructure and high fixed costs of distribution required to ensure supply of aluminum. A natural monopoly occurs when a particular company regulates a scarce physical resource such as aluminum among other resources (Foster, 2014). The pertinent range demand for the product is attained when the demand curve is above average cost curve. In such situation, it becomes cheaper for one vast and well-established company to supply the product to the market than other multiple smaller enterprises. 

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In fact, if the government does not intervene to resolve issues in such markets, the establishment naturally progresses to become a monopoly (Tisdell, 2013). However, the early entrant in the market has advantages over late arrivals. The first arrival expands rapidly and efficiently excludes smaller entities from entering. Correspondingly, the established companies may buy out or drive other companies out of business. For instance, Alcoa acquired other companies such as Lockheed and Furukawa, a Japanese manufacturer, and purchased Rea Magnet among other companies to secure its monopolistic control over aluminum industry (Bumas, 2015). Though quite successful, natural monopoly encounters inefficiencies just like any other monopoly. A natural monopoly company that is out to make the profit will produce more when the marginal costs equal marginal revenue. Aluminum has been a very significant natural resource yet it highly useful in the manufacturing industry. Although other firms would produce aluminum, they were unable to produce adequate aluminum that would compete with Alcoa, a major player in the industry (Smith, 2013). Although producers using this market type of competition are at liberty to raise their prices because they are completely in control over the market, Alcoa banks on competitive and advanced production techniques to offer affordable aluminum. At the same time, it may not be easier for Alcoa to push up prices at will because they are likely to lose sales. The reason is that there will be less aluminum demanded than they can produce (Hirschey & Bentzen, 2016). 

The rise in prices of goods and services depends on the concept of elasticity of demand. The elasticity of the application is the proportion change of quantity demanded resulting from 1% change of relative price (Foster, 2014). In this case, the elasticity of demand refers to how sensitive the demand for aluminum may be to changes in additional economic variables, including prices and consumer income. Monopoly is successful when the demand curve is inelastic. Consequently, the demand curve for aluminum is inelastic since its demand is insensitive to changes in price or income (Tisdell, 2013). The demand for aluminum is highly inelastic. Accordingly, the producers may increase their prices above the competitive level. However, the price of aluminum does not regularly change because no consumer will be comfortable to purchase goods when they are sold at higher prices that they can afford (Bumas, 2015). Although monopoly has been regarded as one of the most significant competitive market forces, it has been undermined by technology and globalization. 

According to Smith (2013), Alcoa had initially suffered competition from Reynolds and Kaiser Companies that could also produce aluminum though not in large scale. However, despite the increase in competition, Alcoa maintained as the industry’s primary aluminum producer because of its ability to manage the prices. Hence, Alcoa forms largest aluminum manufacturer in the entire world (Hirschey & Bentzen, 2016). Alcoa’s major operations included bauxite mining, aluminum smelting, and alumina refining. The company enjoying monopoly may be required to adopt another useful measure to safeguard its monopolistic status (Smith, 2013). For instance, Alcoa had to diversify and internationalize to ensure its future prosperity. In the late 1990s, the Alcoa Company was systematized into twenty-one business units were 178 stations were functioning in 28 countries. 

Monopoly is characterized by lack of competition to produce the service or good as well as the shortage of viable substitute goods. According to Bumas (2015), Alcoa honestly acquired monopoly by outdoing other companies through superior efficiencies. Consequently, the breakthrough was as a result of its best practices that ultimately lead to efficiency, sustainability, safety, and stronger communities wherever the company operates. Alcoa embarked on its imminent course and had continued to reign as the distinguished aluminum producer throughout the globe (Bumas, 2015). Competition is a significant market structure because it enables the producers and sellers to offer goods the buyer intends to purchase. Producers and sellers produce products and a reduced cost because quest to get the market share regarding profits, sale volumes and other benefits. Moreover, enterprises increase their output especially when prices are higher than the marginal cost (Tisdell, 2013). Through exercising economic supremacy in the global market, a major firm throughout the globe that proves competitive is rewarded.   

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  1. Bumas, L. O. (2015). Intermediate Microeconomics: Neoclassical and Factually-oriented Models. Boston, Massachusetts: Cengage Learning.
  2. Foster, J. B. (2014). The theory of monopoly capitalism: An elaboration of Marxian political economy. New York, New York: Monthly Review Press.
  3. Hill, C. W. L., Schilling, M. A., & Jones, G. R. (2017). Strategic management: Theory. Boston, Massachusetts: Cengage Learning.
  4. Hirschey, M., & Bentzen, E. (2016). Managerial economics. Andover, Hampshire, United Kingdom: Cengage Learning. 
  5. Smith, G. D. (2013). From monopoly to competition: The transformations of Alcoa, 1888-1986. Cambridge: Cambridge University Press.  
  6. Tisdell, C. A. (2013). Competition, diversity and economic performance: Processes, complexities and ecological similarities. Cheltenham: Edward Elgar Pub.  
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