The American Economic System

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Competition benefits both business and the consumer. Thanks to competition we have lower prices, better service, new and improved products, better efficiency, and we can offer better opportunities for talented and industrious employees, than do non-capitalist countries. Within the private enterprise system, there are four basic types of competition: pure competition; monopolistic competition; oligopoly; and monopoly. Any business will belong to one of these categories, based on the competition of its specific industry.

Pure competition results when there are so many small businesses comprising an industry that no one business can influence the price charged on a fairly uniform product. Thus price is established by supply and demand. The classic example of pure competition is agriculture, where there are so many farmers selling similar products like corn, wheat, soybeans, etc., that no one farmer can set the price.

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Monopolistic competition occurs in industries where there are fewer businesses (than pure competition), and where the products are often differentiated from those of competitors by non-pricing factors. For example, several businesses manufacture baseball bats; however, there is only one “Louisville Slugger” brand. Each manufacturer offers different types and sizes of bats, both wooden and aluminum, at different prices. This type of competition gives each business some power over the prices it charges.

An oligopoly exists when there are few competitors. The most obvious oligopolies are the automobile and steel industries. In an oligopoly, the products can be similar (steel) or different (automobiles). However, unlike other types of competition, the oligopolist has considerable control over the product’s price.

In a monopoly, there is no competition. To many people, this notion of a market situation without competition is un-American. In this country monopoly is prohibited by the Sherman and Clayton Acts, except when regulated by the government. Existing monopolies regulated by the government include utilities such as telephone, natural gas, and electricity. In these industries, the government’s regulatory body sets prices and profits.