Acumen:
International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
Volume 2, Issue 6
22
Acumen: International Journal of Multidisciplinary Research
THE IMPACT OF COMPETITION ON ECONOMIC GROWTH
Abduvohidova Durdona Sobirjon qizi
1st year student of Gulistan State University
Tel number: +998 93 048 49 06
E-mail:
durdonaabduvohidova19@gmail.com
Abstract:
In this article, we discuss about the significant role of competition in
economic development. It highlights the role of competition in supporting innovation,
increasing economic efficiency, producing higher-quality products and services.
Furthermore, it explores the challenges associated with negative consequences of
excessive or unfair competition, such as predatory price wars, issues of resource
inequity and potential harm to smaller businesses. On the other hand, the impact of
competitive pressures from foreign markets, measured by trade freedom, is dependent
on the country's technological gap. In particular, the results show that trade freedom
has a stronger negative impact on growth as countries move closer to the technological
frontier. Such an impact of trade freedom on growth applies to all countries, including
MENA ones.
Key words:
competition, innovation, productivity, consumer, technological gap,
monopoly, technological frontier, trade freedom, economic growth.
Introduction:
In today`s fast-paced world, the competitive environment has
rapidly developed in almost all sectors, especially in the economy. In macroeconomics,
competition refers to the process by which countries compete with each other for
resources. In microeconomics, it refers to the process by which individual companies
jockey with each other to appeal to consumers. Competition is a fundamental
characteristic of market economies, playing a crucial role in determining the dynamic
of supply and demand, pricing and innovation. In economics, competition refers to a
process by which various sellers each try to offer better, higher quality products, lower
prices and other advantages to choosing their wares over a rival`s. These forces
companies to optimize their operations, ultimately benefiting consumers and fostering
economic growth. However, alongside these benefits, there are also challenges, such
as unfair competition, price wars, putting local businesses out of business. Competition
in business is a fact of life for any industry and carries advantages and disadvantages
for both sides of the transaction. While competition stimulates innovation and
Acumen:
International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
Volume 2, Issue 6
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Acumen: International Journal of Multidisciplinary Research
generates more choices, too much competition can hurt smaller businesses. Ultimately,
large companies reduce consumer options. This article explores the impact of
competition, highlighting both its advantages and disadvantages.
Most traditional economists believe increased competition leads to greater
benefits for all economic participants. One of the most significant advantages of
technology in economy is e
fficiency and innovation.
Competition encourages
businesses to find ways to improve efficiency, lower costs, and develop new products
and services. Economic analysis indicates more competitive markets lead to both
increased innovation and greater overall economic growth as a result. If entrepreneurs
feel the need to compete with other companies, they have an incentive to provide more
unique and far less rare products for their customers. Competition also leads many
brands to develop new products regularly to stay relevant to consumers. At the same
time, the presence of competition also creates lower prices and wide choice for
consumers. The large number of competitors in the market and their efforts to attract
people to sell their products open up a wide range of opportunities for consumers.
When a large number of companies compete with each other, one of the easiest ways
for one to gain a competitive advantage over the others is to offer lower prices. As
such, greater market competition leads to greater price competition, resulting in
retailers passing on lower costs to their consumers. Product differentiation due to
competition among sellers often gives consumers greater decision-making power. In a
competitive economic environment, customers can choose between different products
from a wide variety of brands rather than buying the same identical products one week
to the next from a small number of companies or even a single firm. It has an affect on
job creation. Fierce competition is expected to stimulate firms willingness to invest and
their demand for labor. There are two key channels through which competition may
lead to job creation. First, competition exerts downward pressure on prices and thus
reduces the level of rents (or price markups) charged by firms. Second, producers can
invest some of their productivity gains to expand their activities in other markets, thus
raising their demand for labor and creating jobs. These two mechanisms both increase
demand for jobs, bringing new, more, and better jobs into the economy.
Just as there are two sides to a coin, while competition benefits consumers and
promotes economic growth, it also has some negative consequences. One of the most
pressing issues is the emergence of monopolies. In a monopoly situation companies
drive competitors out of business. Competition in business decreases an individual
companies market share and reduce the available customer base, especially if demand
Acumen:
International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
Volume 2, Issue 6
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Acumen: International Journal of Multidisciplinary Research
is limited. A competitive market can also force lower prices to stay competitive,
decreasing profit margins for each sale or service. Another challenge is the
environment, which has a significant negative impact on the population. In the pursuit
of lower costs and higher profit, competition could drive businesses to ignore
environmental sustainability, leading to pollution and depletion of natural resources.
While competition plays a crucial role in economic growth, it is important to mitigate
its potential downsides through appropriate regulations, social policies and corporate
responsibility initiatives.
Theoretical basis:
According to standard economic theory, competition is
defined as a market situation in which suppliers strive for consumers in a way that
induces them to become more efficient and capable of offering a wide variety of
products and services at lower prices. Economists have long been interested in
analyzing the role of competition for innovation and economic growth, hence, many
theoretical arguments as well as empirical studies trying to explain such relationship
were presented in literature. In general, theoretical models identify two opposing
effects regarding the role of competition for innovation and growth.
Conventional wisdom - dating back to Adam Smith - predicts that competition
induces a better allocation of resources and spurs efficiency, which ultimately increases
consumer welfare and promotes economic growth. In a competitive market a product
will be offered at a price based on the competition between different suppliers, while
if there is no sufficient competition, as in the case of a monopolized or cartelized
economy, market participants may obtain dominant market positions that allow them
to set higher prices in their favor, hindering allocative efficiency from materializing
which in turn leads to lower growth rates. Moreover, the fight for and the defence of
monopolies may lead to a misallocation of investments, which further results in a loss
in economic efficiency
1
.
On the other hand, Schumpeter (1942) claimed that monopolies are more
innovative than firms with small or even negligible market shares since they are able
to offer their products at a higher price than in a competitive market, which will allow
them to reap greater returns to their innovations. Consequently, Schumpeter argued
that competition is detrimental to innovation and thus hampers rather than foster
economic growth, as it reduces such monopoly rents that reward successful innovators
and thereby discourages R&D investments, whereas monopoly market structures
1
Romero, 2003, Voigt, 2009, Peterson, 2013.
Acumen:
International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
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Acumen: International Journal of Multidisciplinary Research
would lead to higher rates of innovation and subsequently growth pointing to a tradeoff
between static and dynamic efficiency. Schumpeter's hypothesis has been used to
justify the creation of national champions (Voigt, 2009).
On the other side, Schumpeter's theory introduces a more nuanced understanding
by suggesting that monopolistic firms may have an edge in innovation due to their
ability to secure monopoly rents, thus incentivizing them to invest in research and
development. This viewpoint highlights the potential trade-offs between static
efficiency—achieved in competitive markets—and dynamic efficiency—achievable
through monopoly structures. Amid the above arguments, Aghion et al. (1997) and
Aghion et al. (2001) extended the Schumpeterian growth framework and managed to
develop new models of competition and growth by introducing the possibility that more
competition could be conducive to innovation and economic growth through the
"escape-competition" effect. More precisely, competition may increase the incremental
profits from innovating, and thereby encourage R&D investments aimed at "escaping
competition", particularly in sectors where incumbent firms are operating at similar
technological levels; i.e. "neck-and-neck" sectors, since intensive competition between
firms will increase each firm’s incentive to acquire or increase its technological lead
over its rivals.
Furthermore, new endogenous growth models introduce the notion of
"technological distance" and underline its significant role in determining the impact of
competition on innovation. They postulate that competition could have opposite effects
on innovation incentives depending on whether firms were initially closer to or farther
below the fringe in the corresponding industry. In particular, new endogenous growth
models predict that competition should be growth-enhancing in sectors where
incumbent firms are close to the technological frontier and/or compete "neck-and-
neck" with each other, since in those sectors the "escape competition" effect should be
the strongest. On the contrary, competition reduces innovation incentives and therefore
productivity growth in industries where innovating firms are far below the frontier, as
the Schumpeterian effect is more likely to dominate in these sectors (Aghion and
Howitt, 2005).
In this context, Aghion and Howitt (1998) build upon Gerschenkron’s idea of
"appropriate institutions" and emphasize the role of "technological distance" in the
growth process; claiming that different institutions or policy designs will affect
productivity growth differently depending on a country’s distance to the world
technological frontier (Aghion and Howitt, 2005). The argument is based on the
Acumen:
International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
Volume 2, Issue 6
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Acumen: International Journal of Multidisciplinary Research
following reasoning: For countries with low levels of technology i.e. far from the
frontier, it is recommended that they follow an imitation-based economic policy to
exploit the results of existing innovations. In terms of competition policy, this means
that trade liberalization is more favorable for these countries in order to attract foreign
direct investment and promote technological progress through the adoption of foreign
technologies. On the contrary, business liberalization in this stage discourages
investing in research and development and hence innovation, since the higher entry
threat of technologically advanced firms decreases the incumbent’s expected pay-off
from innovating.
Dicussion of results:
The main aim of this analysis is that the ongoing debate
over the relationship between competition, innovation, and economic growth reflects
two distinct yet compelling perspectives in economic theory. On one hand, traditional
views, rooted in the works of Adam Smith, posit that competition drives efficiency,
fosters resource allocation, enhances consumer welfare, and ultimately propels
economic growth. This perspective foregrounds the critical importance of competitive
markets in preventing monopolistic behaviors that can adversely affect pricing and
investment decisions.
Competition depends mainly on barriers to entry that may prevent new firms
from accessing the market. A fundamental precondition for the existence of intensive
competition is that market entry is fairly easy. This should apply for both domestic and
foreign entrants.
Also, based on recent empirical literature on competition and growth, this work
takes into account the distance from the technological frontier as a possible determinant
of economic growth, both as a single explanatory variable, and also as a factor of an
interaction term with both business freedom and trade freedom indices to explore
whether the effect of competition on economic growth may change depending on the
level of the technological gap between the observed country and the country which is
the technological leader. The leader country (technological frontier) is identified as the
country with the highest labour productivity in the sample, while the technological gap
is calculated as the ratio of labor productivity of the country under consideration to the
labor productivity in the leader country. Accordingly, the technological gap variable
ranges from 0 to 1, with lower values indicating larger gaps. Labour productivity is
measured as GDP per person employed (constant 1990 PPP $), and is obtained from
the World Development Indicators.
Acumen:
International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
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Acumen: International Journal of Multidisciplinary Research
The above idea depicts regression results when standard economic variables are
controlled for. This indicates that more intensive domestic competition tends to slow
down the growth rate of an economy regardless of the country's technological gap.
Such results assert the basic Schumpeterian argument of the tradeoff between static and
dynamic efficiency; where competition discourages the incumbents' incentives to
innovate and hampers economic growth by sweeping away monopoly rents that reward
successful innovators. The standard control variables are all significant and have the
expected signs. More precisely, we observe that more trade openness and increased
investment enhances economic growth, whereas higher inflation rates and the rapid
expansion of government consumption expenditures can slow down the growth of the
economy.
Conclusion:
In this paper, we tried to revisit the puzzling relationship between
competition and economic growth, focusing on how the country's distance to the
technological frontier can influence the impact of competition on growth. Within
, the drive of enterprises is to maintain and improve their
own competitiveness, this practically pertains to business sectors. The most important
aspect of competition is that in order for it to continue, without leading to the permanent
dominance of one side, there must be “competitive relations between equal parties.”
2
However, the home improvement industry’s high demand opened up many
opportunities for companies committed to high-quality, affordable service.
Competition between businesses or individuals to achieve competitive advantage and
attract customers or resources benefits consumers and stimulates economic growth. In
particular, business freedom was used to proxy 206 for domestic competition due to
the entry or the activity of other firms in the market, and trade freedom was employed
to proxy foreign competition through the threat of entry of foreign firms or products to
domestic market.
On the other hand, as countries get closer to the technological frontier, the
economic policy adopted should aim at promoting innovation in order to invent new
products and production techniques or improve the quality of the existing ones. Within
competition policy context, this implies that business liberalization is more beneficial
for such countries, since the increased possibility of entry in the market and thus the
higher potential competition from the incumbent firm incentivizes both the incumbents
and the entrants to invest more in innovation, as it offers the only way to survive in the
2
Michael Brecher. The world of protracted conflicts, May 26, 2016 - p. 11; citing Gary Goertz; Paul F. Diehl (June 1993 ).
“Enduring Rivalries: Theoretical Constructs and Empirical Patterns”. Vol. 37, No. 2 147-171 - p.
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International Journal of
Multidisciplinary Research
ISSN: 3060-4745
IF(Impact Factor)10.41 / 2024
Volume 2, Issue 6
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Acumen: International Journal of Multidisciplinary Research
market. Whether it’s direct or indirect, competition is a fact of life for almost any
business. Economic competition allows the so-called “invisible hand” of the market to
reward the most effective seller, rather than relying on a central committee or monopoly
to plan the economy. In simple terms, this means whoever provides the best product at
the lowest price is likely to receive the highest rewards, at least theoretically.
Competition is not a struggle of all against all. Competition occurs where interests
clash, and cooperation arises where interests are aligned. “Competition is the main
condition of the market, one might say its law.”
REFERENCES:
1.
Competition Economics: Imperfect and Perfect Competition written by
MasterClass (Featured masterclass instructor - Paul Krugman)
2.
Competition and Economic Growth: An Empirical Analysis with Special
Reference to MENA Countries. Marwa M. Gomaa Cairo University
3.
Acemoglu, D. P. Aghion, and F. Zilibotti (2006), “Distance to Frontier, Selection,
and Economic Growth”, Journal of the European Economic Association, 4(1):
37–74.
4.
Aghion, P., C. Harris and J. Vickers (1997), “Competition and growth with step-
by-step innovation: An example”, European Economic Review, Elsevier, 41(3-
5): 771-782
5.
The-Effects-of-Competition-on-Jobs-and-Economic-Transformation.
(
equitable growth, finance & institutions insight)
6.
Assessing the impact of competition authorities` activities (OECD)
7.
https://en.wikipedia.org/wiki/Competition_(economics)
