We often think of the competitive domain, or competition, as primarily an economic factor in an organization's environment. Indeed, competition is a strong influence on the economic activity of an organization and often requires managers to make economic decisions (e.g., the price to set for a product). However, competition needs to be considered beyond its economic implications.
Organizations can be faced with a wide variety of competitive conditions in their environment. Some large organizations compete only with small organizations, often giving them the advantage in the pricing of their products. Other competitive conditions arise from different mixes in the strategies that competitors pursue. For instance, a firm that produces 40 varieties of soup may have to compete with firms that also produce many varieties of soup as well as firms that produce only a few varieties. Competition for sales of soup may also differ in the areas of packaging (can versus frozen pouch), form of the product (wet versus dry soup), or varieties of cuisine (Oriental, European, Spanish).
Within a capitalist system, organizations can operate in one of four competitive market structures: monopoly, oligopoly, monopolistic competition, or perfect competition. A monopoly exists when an organization has sole access to the market for its goods and services. In a monopoly situation, competitors either have been restricted from access to customers or have voluntarily chosen not to compete in the market. Restrictions to markets may occur when regulatory agencies or governments grant a single organization the right to provide a good or service in the market. Utility companies are the most common form of organization operating under monopoly conditions. However, many governmental agencies, such as police departments, sanitation services, public schools, and transportation services, also operate under monopoly conditions that are purposely restricted by legal sanctions. Monopolies also can exist where competitors have chosen not to compete with a single firm operating in the market. Daily newspapers in many towns and cities are examples.
An oligopoly exists when only a few firms are in competition to provide goods and services to a market. In this situation the number of firms producing a good or service is so small that actions by any single firm in the industry concerning price, output, product style, and terms of sale have a perceptible impact on the sales of the other firms. The goods or services produced by oligopolists may be similar, as in the case of basic steel, aluminum, and cement. Or they may be different, as in the case of automobiles, cigarettes, home appliances, soaps, and detergents.
Monopolistic competition exists when many firms offer a similar good or service with only minor price differentials. Customers may recognize that the price of a sport coat is $5 lower at another store but may choose to spend the extra amount to avoid having to drive across town. Gasoline stations operate under conditions of monopolistic competition, as price differentials are often minor ($.01 to $.05 price variations for most retail sellers of gasoline). The extra amount is willingly spent by the customer. Indeed, most organizations that provide a specialized good or service operate under monopolistic competition. While small price differentials may have little effect on volume sales, managers must be sensitive to large discrepancies in price. Many customers may opt to absorb the inconvenience or extra expense to get a lower price. Often, managers try to respond to price discrepancies by marketing their products as unique (e.g., gel toothpaste) or by offering more pleasant surroundings (e.g., carpeting in a grocery store).
Perfect competition exists where many organizations offer essentially the same good or service. Price becomes the primary discriminator for the customer, who is presumed to have full knowledge of price disparities and wants to buy the good or service at the lowest available price. While perfect competition is rare in most industrial sectors, some sectors come close to meeting the conditions of perfect competition. The markets for many agricultural commodities, such as wheat, operate in a structure closely resembling perfect competition. One farmer's produce is essentially like any other farmer's produce. If a farmer chooses to demand a price for wheat higher than that of other farmers, buyers would probably not choose to buy the more expensive wheat.