Merriam-Webster gives as one definition of competition (relating to business) as "[...] rivalry: such as [...] the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms". Adam Smith in his 1776 book The Wealth of Nations and later economists described competition in general as allocating productive resources to their most highly valued uses and encouraging efficiency.[need quotation to verify] Later microeconomic theory distinguished between perfect competition and imperfect competition, concluding that no system of resource allocation is more efficient than perfect competition. Competition, according to the theory, causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater selection typically causes lower prices for the products, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).
However, competition may also lead to wasted (duplicated) effort and to increased costs (and prices) in some circumstances. For example, the intense competition for the small number of top jobs in music and movie-acting leads many aspiring musicians and actors to make substantial investments in training which are not recouped, because only a fraction become successful. Critics[which?] have also argued that competition can be destabilizing, particularly competition between certain financial institutions.
Experts have also questioned the constructiveness of competition in profitability. It has been argued that competition-oriented objectives are counterproductive to raising revenues and profitability because they limit the options of strategies for firms as well as their ability to offer innovative responses to changes in the market. In addition, the strong desire to defeat rival firms with competitive prices has the strong possibility of causing price wars.
Another distinction appearing in economics is that between competition as an end-state – as in the case of both perfect and imperfect competition – and competition as a process. That process is typically seen as a process. It is a process of rivalry between firms (or consumers) intensifying selective pressures for improvements. One can restate this as a process of discovery.
Three levels of end-state economic competition have been classified:[by whom?]
In addition, companies compete for financing on the capital markets (equity or debt) in order to generate the necessary cash for their operations. Investor typically consider alternative investment opportunities given their risk profile, and not only look at companies just competing on product (direct competitors). Enlarging the investment universe to include indirect competitors leads to a broader peer universe of comparable, indirectly competing companies.
Competition does not necessarily have to be between companies. For example, business writers sometimes refer to internal competition. This is competition within companies. The idea was first introduced by Alfred Sloan at General Motors in the 1920s. Sloan deliberately created areas of overlap between divisions of the company so that each division would compete with the other divisions. For example, the Chevrolet division would compete with the Pontiac division for some market segments. The competing brands by the same company allowed parts to be designed by one division and shared by several divisions, for example parts designed by Chevrolet would also be used by Pontiac. In 1931 Procter & Gamble initiated a deliberate system of internal brand-versus-brand rivalry. The company was organized[by whom?] around different brands, with each brand allocated resources, including a dedicated group of employees willing to champion the brand. Each brand manager was given responsibility for the success or failure of the brand, and compensated accordingly.
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