What Is Effective Competition?

Effective competition is when two or more independent businesses are competing against one another to gain a profit. For it to be a truly effective competition, the two or more businesses must offer comparable services, or they may be considered in different markets and not actually in competition with each other. Some countries and regions have laws that allow businesses to only have a percentage of the overall market to avoid becoming a monopoly, which may be illegal in some areas. The benefits of this competition are lower prices, and the inability of any one business to dictate prices.

For effective competition to exist, there must be at least two businesses offering a service or product. Some businesses try to be sneaky and have two affiliated businesses appear to be separate businesses. The two businesses are affiliated, though, so they are not really competing with each other. Many countries and regions will prosecute businesses that practice this, because they unfairly try to control the market.

Another perquisite for effective competition is that the two or more businesses must offer a comparable service. For example, if one company makes action figures and another makes children’s video games, then they cannot be considered competition, even though both are targeting children. There can be some differences in the product to differentiate the companies, but they must offer a similar product or service to truly compete.

Some countries and regions may keep a company from holding too much of the market, because this is considered a monopoly. To keep all customers satisfied, and to encourage competition, the two or more businesses must take portions of the entire market. For example, if one company can legally hold 30 percent of the market, then at least four companies will be needed to satisfy all the customers. The percentage is based on the industry and the country or region where the companies are based.

While most businesses dislike effective competition — they have to spend more money on marketing and it's hard to grow beyond a certain limit — this is done to benefit customers. When businesses have to compete, they have to offer better services or prices to attract people. If a business is allowed to control an entire market, then it can set the price for a product or service as high or as low as it wants, which may cause customers to pay extravagant amounts of money for an otherwise cheap service or product.