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Knowledge Base

The Importance Of Competition

Why does competition lower prices?

Every buyer seeks to get what they want at the lowest price possible, and sellers want to sell what they have at the highest price. If a buyer can only purchase what they want from one person, that person or business can, over time, figure out the maximum amount the buyer is willing to pay and charge them that amount. But a second seller in the market would have the incentive to charge just under what the first would charge. The two sellers’ incentives push the price down to the amount that is the minimum amount they’d accept.

Why does competition increase innovation?

If there is only one seller and no competition, the seller only needs to keep selling the same item over and over in order to be happy. But when buyers have many options to choose from, they will choose the best item that meets their budget. Making products better is one way to get buyers to choose them, and it causes sellers to spend time and effort innovating and improving existing products.

What is an example of prices falling due to competition?

In order to offer taxi services in New York City, drivers had to purchase a taxi medallion from a restricted supply. The price of medallions rose to over a million dollars per medallion. But once taxi drivers started facing competition from Uber and Lyft drivers, the price of medallions plummeted. The cost of starting to offer ride sharing services fell from over a million dollars a for new entrants to almost nothing.