Competition

Competition between suppliers (but also between demanders) is the central precondition for functioning markets and market-related economic systems. It ensures that the suppliers who satisfy the needs of the demanders best and with little effort (i.e. high efficiency) are successful in the market, while poorly performing companies have to leave the market. Competition among demanders generally ensures that those who particularly appreciate the good receive it and are therefore willing to pay the market price (which in neoclassical theory is the ratio of supply and demand).

In markets with few suppliers (oligopolies) there is a tendency towards competition-reducing agreements or cartels, as higher prices or lower quality can be enforced on the market. Because of these welfare-reducing effects, price and quantity cartels are normally prohibited. Nevertheless, competitors can also cooperate with each other to increase prosperity, for example in joint research activities or to agree on certain standards.