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Competition: the fuel that makes our economy run

By ALAN MUSANTE

© St. Petersburg Times, published December 14, 2000


Business Basics Chapter Five

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[Times art: Teresanne Cossetta]
Imagine that your family's house is next to a very long bicycle trail. It is used by a lot of long-distance riders, and you're the only house within 10 miles. A lot of cyclists take breaks under a very nice shade tree next to your yard, and you've heard them talking about being hot and thirsty.

Suddenly, you have an idea! You begin to sell drinks at a price of $1 for eight ounces, and sandwiches at $2 apiece. With no competitors, you're selling all your drinks and sandwiches each Saturday and Sunday. The profits are adding up, and you're feeling like a very successful business person.

Soon, you improve on your idea. Since you have no competition, you see a way to increase your profits. You raise your price to $1.25 for a drink and reduce the size to seven ounces. With a higher price and less cost to you, you certainly make more profit. Your sandwiches get a little smaller, too. You raise their price to $2.50.

Is your improved idea good for you? Is it good for your customers? What can change this scenario?

Competition.

Not long after your business changes, some new neighbors move in. They notice your success, and they decide to go after some profits of their own. They are selling eight-ounce drinks for just $1, and sandwiches the size you used to sell are going for $2! Your customers are deserting you to go across the trail for a better deal. Now you have to decide what to do to recapture your business.

In doing so, you must think about how the current situation is different from the beginning. How can you win back customers? Which situation is better for customers? Which is better for you?

Good for customers and companies

The second scenario changed the business landscape for you because of competition. In the beginning you had a monopoly: that is, you were the only business around. You could charge pretty high prices and get them because the buyers had no choices. But things changed quickly when competition moved in, didn't it? Without competition, prices tend to rise, choices are reduced and quality declines. We refer to the lack of competition, for example when there is only one seller, as a monopoly. It is often easier for the seller than having to worry about what the other sellers are doing, but it is often not so great for the customers.

You know about competition from sports. Athletes and teams try to improve themselves to become winners. Winners themselves need to improve, as new challengers come up to test them. Weaknesses need to be reduced, strengths need to be made stronger. Competition continually demands improvements.

Money Stuff: Get it! Spend it! Keep It!

Introduction and previous chapters

The business world works similarly. Here, the areas of challenge are in pricing, quality, service and number of choices provided to customers. Instead of wins and losses, businesses measure success in profits -- the difference between money brought in from sales and money they had to pay out to produce and sell their product. The best way to earn profits over a long period of time is usually by giving customers lots of choices, great service, high quality and low prices. Producers and sellers know that if they're not alert, their competitors will steal away a lot of customers and profits.

Our American economic system is deeply rooted in competition, but other ways of doing business exist. Under the Communist system of the old Soviet Union, the government produced most items itself and did not allow competition. It should come as no surprise that quality tended to be poor, prices were high, service was crummy and consumers had few choices. Similarly, the Cuban government, also Communist and anti-competition, recently made an announcement that showed how the lack of competition influences life. They will now allow color televisions to be sold in the nation. Previously all TVs had been black and white only. Of course, there are only two or three stations to be received, and they're also government controlled. American competition provided superior television to this country several decades ago.

Some people believe monopolies are always illegal in the United States. This isn't so. Sometimes monopolies occur in a place where nobody has yet decided to compete with an existing seller, such as in a small town with only one grocery store. This is perfectly okay under our laws.

Another common kind of monopoly happens for technological reason. Sometimes it is cheaper for one company to produce a product in large amounts than to have several smaller companies dividing the production. With cheaper production costs can come lower prices for customers. These monopolies (generating and selling electricity is an example) are allowed, but with some controls imposed by the government to protect consumers.

What are illegal are monopolies (or near-monopolies) that tend to be harmful to consumers: for example, those that don't allow for price competition or hold down improvements that would be good for customers. The federal government's antitrust laws give it the power to "break up" such monopolies in order to promote competition. Such companies as Wal-Mart and Microsoft have been charged as acting as monopolies under these laws.

Competition is indeed a cornerstone of our economic system. It forces producers to discover and meet the wishes of customers. The sellers that do that best are rewarded with profits. We customers benefit through lower prices, better quality, better service and increased choices. The trend around the world is to move away from anti-competitive economic systems and toward American-style competition. Though it is sometimes harsh (there are losers in competition), there is little doubt that competition mostly benefits all consumers.

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Alan Musante was named the Florida Economic Educator of the Year by the Florida Council on Economic Education in 1999. He also has won many national and state awards in economic education. Musante, a former attorney, has taught high school for more than 20 years and currently teaches at Oviedo High School.

About the Florida Council on Economic Education

Money Stuff was developed by the Florida Council on Economic Education and project director Fonda Anderson. The council is a statewide non-profit organization founded in 1975 to educate K-12 teachers and students about the free enterprise system and to instill in them an appreciation for a market economy. For more information on the council's programs for teachers and students, please call (813) 289-8489.

About Newspaper in Education

The St. Petersburg Times devotes news space to NIE features throughout the year, including this classroom series. The Times' NIE department works with local businesses and individuals to enrich the classroom experience by providing newspapers, supplemental guides and educational services to schools in the Tampa Bay area. To find out how you can become involved in NIE, please call (727) 893-8969 or (800) 333-7505, ext. 8969. For past chapters, check out http://www.sptimes.com/nie and click on Money Stuff.

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