Business

Environment

B.N. Ghosh

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 Chapter 9

Competitive Environment

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 Learning Objectives
• The meaning, aims, strategy, and types of competition
• The difference between perfect and pure competition
• The importance of competition
• International and national competitive environment
• The competition law of India
• The role of the Global Competitiveness Index

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 Competition: aims, strategies and
types
• Competition is a struggle to gain market supremacy by
defeating the rival in the business.
• Competition is a strategy that aims at doing better than the rival
producer in the business in terms of quality, price, and the market
share of a product.
• Competition is a process and strategy to run the business with at
least two proximate aims and objectives

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 Keep Up with the Joneses
• This phrase means that just to survive in the business along with
others, it is necessary to have a strategy, which may not be very
aggressive but only to stay on with a condition often known as
homeostasis (just to survive) and maintain the status quo.
• In business, competition is the key to survival of a business, which
is surrounded by rivals and competitors from within and without.

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 Go Ahead of Smith
• It is another kind of competitive strategy, where one wants to
defeat others in the race. This needs very dynamic, progressive, and
efficient business acumen so that one can go ahead of other
business persons and rivals.
• When a business becomes very successful, it can defeat any type
of price competition and non-price competition, and it becomes so
pervasive and big that it becomes a monopoly.

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Types of Competition

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 Perfect competition and pure
competition
Perfect competition is an idealistic market structure, which is not
experienced in the real world.
A market structure, which can be called perfect, will have the
following features:
• The participating firms are guided by the philosophy of profit
maximization.
• All products are homogeneous in quality.
• Any firm can enter the business and also get out of business any
time, meaning there is no restriction.
• Every firm only takes the price, which is already decided by the
market (price taker).
• No firm is able to change the price level through its own action or
influence .
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 Perfect competition and pure
competition
 There are innumerable buyers and sellers.
 The products are all divisible.
 There is no restriction on the movements of goods and factors of
production in the market.
 There is no government intervention, restriction, or regulations in
the market. The market is completely free. The buyers and sellers
enjoy freedom of choice and actions.
 Information asymmetry on the part of buyer and sellers are
completely absent. That is to say, the market is completely
transparent, and everybody’s knowledge about the goods, prices,
availability, and quality is perfect.

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 Distinction between perfect
competition and pure competition

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Competitive equilibrium and efficiency
• It is often postulated that economic efficiency is generated only by
competitive equilibrium.

• The efficiency or economic gains can be reaped by producers and

consumers.

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 Growth of Monopoly
• A type of market structure where there is only one seller but many
buyers is called monopoly.

• A monopolist supplies a particular commodity, which generally has

no close substitute.

• There are barriers of entry of different types, such as legal

barriers, economic barriers, and so on

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Growth of Monopoly

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 Imperfect Competition
• In modern times, imperfect competition dominates the market
structure.

• In such a market condition, there are many buyers and many

sellers in the market selling a particular product but generally there
are some product differentiations.

• Basically, the firms in imperfectly competitive market

structure will have some market power and control over the
pricing process.

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 Why is competition necessary?
Competition makes it possible to utilize the capacity to produce. It
reduces excess capacity.

• Competition brings out the real worth of an enterprise; so to say, its

shadow worth.

• Competition increases the economic efficiency. It produces the

optimum allocation of resources so that productivity can be improved
and comparative advantages can be reaped.

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 Why is competition necessary?
• Competition leads to better ability of learning by doing, and it enables
a firm to know the tricks of winning over others’ firms.

• Competition makes a firm optimally efficient so that it is able to

produce with less time or less resources.

• An important social purpose is served by competition.

• It breaks up monopolies, concentration of wealth, and social

hierarchy of wealth production and distribution. The economic system
becomes more democratic.

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 Competition or Contestability?
• Contestability is a very broad concept that makes the firm
capable of competing in the market whenever necessary.

• Contestability is the ability of the firm to contest; it may not

actually compete but it has the potentiality.
• Competitive effort needs technological improvements, use of
sophisticated methods, and the production of qualitatively better
output. All these make the firm
internationally competent and capable of exporting abroad.

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 Competitive environment:
international and national
Determinants of Competitive Environment
Tax laws
Legal Issues
Market size and purchasing power of the people
Availability of infrastructure
A responsive market
Political pressure and corruption
Threats from both actual and potential competitors
Labour market conditions
Financial market conditions
Technological environment
Supply of inputs
Inflation rate
Exchange rate
Anti-trust legislation
Presence of business opportunities
Stable macroeconomic fundamentals
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 Competition law of India (2002)
The Directive Principles of State Policy of India envisage the
following:

 The ownership and control of the material resources of the

community are so distributed as to achieve the common good.

 The operation of the economic system does not result in the

concentration of wealth and means of production to the
common detriment.

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 Competition act of 2002
• High level committee to review MRTP ACT 1999
• November 2000 draft
• Passed in 2002 December
• Key features
– The Industries (Development and regulation) Act 1951
no longer necessary except of location.
– The Industries disputes Act, 1947 amended for easy exit
and entry.
– BIFR formulated under Sick Industrial Companies (Special
Provisions) Act 1985 should be abolished.

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 Competition act of 2002
• MRTP Act repealed and MRTP commission
wound up.
• Pending UTP cases transferred to consumer
courts.
• CCI
– Administration and enforcement
– Proactive involvement in government policy
– Merger Bench
– Collegium Selection Process for Chairman and
Members
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 Comparision
• MRTP ACT 1969 • COMPETION ACT 2002
1. PRE-FORMS SECNARIO 1. POST REFORM
2. SIZE AS FACTOR 2. STRUCTURE
3. OFFENCES NOT 3. OFFECES EXPLICIT AND
DEFINED DEFINED
4. NEGATING PRINCIPLES 4. SIMPLE
OF NATURAL JUSTICE COMPREHENSIVE
5. FORWNS ON LANGUAGE
DOMINANCE 5. RULE OF REASON
6. NO COMBINATIONS 6. FROWNS ON
REGULATIONS DOMINANCE
 Comparision
• MRTP ACT 1969 • COMPETION ACT 2002
7. CCI BY GOVT 7. CCI BY COLLEGIUM
8. NO PENALITIES FOR 8. PENALTIES DEFINED
OFFENCES 9. PROACTIVE AND
9. REACTIVE AND RIGID FLEXIBLE
10. UNFAIR TRADE 10. UNFAIR TRADE
PRACTICE COVERED PRACTICE OMITTED
 Main objectives and purposes of
competition act of 2002
The Competition Act of India (2002) has the following main objectives
and purposes:

• Ensure freedom for all the participants in a market.

• Promote and sustain all types of competition in the market.
• Protect and promote the interest of consumers and end users.
• Prevent and discontinue the practices, which are against the policy
of competition.
• Prevent and correct the abuse of dominant power in the market.
• Prevent entry barriers to any trade and business.
• Regulate mergers, amalgamations, and acquisitions, which are
likely to reduce competition.

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Four Pillars of Competition Act of
2002

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Critical Appraisal of India’s Policy on
Competition

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 Global competitiveness index
• The level of competitiveness of a country can be known by its
position in the Global Competitiveness Index.

• The index is based on a number of criteria, such as the level of

infrastructure, the stability of macroeconomic fundamentals, health
status, level of education, efficient market conditions, efficient
labour market, financial market conditions, ability to harness
technology, market size, new and different types of products,
innovation level, public institutions, level of corruption, public trust
of politicians, market efficiency, anti-trust policy, and business
sophistication.

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