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Competition is basic to the free enterprise system. It is involved in all observable phenomena of the market-the prices at which products are exchanged, the kinds and qualities of products produced, the quantities exchanged, the methods of distribution employed, and the emphasis placed on promotion. Over many decades, economists have contributed to the theory of competition. A well-recognized body of theoretical knowledge about competition has emerged and can be grouped broadly into two categories: (a) economic theory and (b) industrial organization perspective. These and certain other hypotheses on competition from the viewpoint of businesspeople will now be introduced.

Economists have worked with many different models of competition. Still central to much of their work is the model of perfect competition, which is based on the premise that, when a large number of buyers and sellers in the market are dealing in homogeneous products, there is complete freedom to enter or exit the market and everyone has complete and accurate knowledge about everyone else.

The essence of the industrial organization (IO) perspective is that a firm’s position in the marketplace depends critically on the characteristics of the industry environment in which it competes. The industry environment comprises structure, conduct, and performance. Structure refers to the economic and technical perspectives of the industry in the context in which firms compete. It includes (a) concentration in the industry (i.e., the number and size distribution of firms), (b) barriers to entry in the industry, and (c) product differentiation among the offerings of different firms that make up the industry. Conduct, which is essentially strategy, refers to firms’ behavior in such matters as pricing, advertising, and distribution. Performance includes social performance, measured in terms of allocative efficiency (profitability), technical efficiency (cost minimization), and innovativeness.

Businesspeople must be continually aware of the structure of the markets they are presently in or of those they seek to enter. Their appraisal of their present and future competitive posture will be influenced substantially by the size and concentration of existing firms as well as by the extent of product differentiation and the presence or absence of significant barriers to entry.

If a manager has already introduced the firm’s products into a market, the existence of certain structural features may provide the manager with a degree of insulation from the intrusion of firms not presently in that market. The absence, or relative unimportance, of one or more entry barriers, for example, supplies the manager with insights into the direction from which potential competition might come. Conversely, the presence or absence of entry barriers indicates the relative degree of effort required and the success that might be enjoyed if the manager attempted to enter a specific market. In short, a fundamental purpose of marketing strategy involves the building of entry barriers to protect present markets and the overcoming of existing entry barriers around markets that have an attractive potential.

From the businessperson’s perspective, competition refers to rivalry among firms operating in a market to fill the same customer need. The businessperson’s major interest is to keep the market to himself or herself by adopting appropriate strategies. How and why competition occurs, its intensity, and what escape routes are feasible have not been conceptualized. In other words, there does not exist a theory of competition from the business viewpoint.

Some of the hypotheses on which his theory rests derive from military warfare:

• Competitors who persist and survive have a unique advantage over all others. If they did not have this advantage, then thers would crowd them out of the market.
• If competitors are different and coexist, then each must have a distinct advantage over the other. Such an advantage an only exist if differences in a competitor’s characteristics match differences in the environment that give those characteristics their relative value.
• Any change in the environment changes the factor weighting of environmental characteristics and, therefore, shifts the boundaries of competitive equilibrium and “competitive segments.’’ Competitors who adapt best or fastest gain an advantage from change in the environment.