Competition: monopoly and competitive markets

Imagine a small winter sports valley where exactly one company operates the ski lifts. The day pass is expensive, the lifts are old, and on busy days you queue for ages – yet everyone still uses them. Why wouldn't they? There is no other lift.

Now picture a city where ten pizza delivery services compete for orders. One advertises free delivery, another offers a family discount, and a third promises delivery in 30 minutes. Anyone who delivers cold pizza gets scathing reviews and loses customers.

In both cases, suppliers meet buyers and prices emerge – yet the markets could hardly be more different. The difference has a name: competition. In this module, you will find out what competition does for prices, quality and new ideas, what a monopoly and an oligopoly are, and why secret price-fixing agreements are banned.

Reflection question for this module: When you or your family buy things, where do you have plenty of suppliers to choose from, and where is there almost no choice? Keep this question in mind. By the end of the module, you will be able to answer it using the economic terms you have learnt.

In “Price formation and market equilibrium”, you saw how the price in a market settles at a certain level. But this only works if buyers can go elsewhere: a supplier who charges too much loses customers to other suppliers. This rivalry between suppliers for customers is called competition – they are competing with one another.

Competition works in three ways:

• Lower prices: No pizza delivery service can charge twice as much as the others – otherwise nobody would order from it. Suppliers undercut one another, and customers benefit.
• Better quality: Where customers have a choice, they choose the better product. Cold pizza, unfriendly service, long waiting times – a supplier facing competition cannot afford any of these.
• Innovation: Anyone who wants to stay one step ahead of their competitors has to come up with ideas: an ordering app, new products or faster delivery. Many things you use every day came about because of exactly this pressure.

In short: competition is the driving force that makes suppliers offer things that benefit customers. They do not do this out of kindness – the market forces them to. And that is exactly why a lack of competition is a problem.

A market with just one supplier is called a monopoly (from the Greek for ‘selling alone’). Buyers have no choice: buy from that supplier or go without.

Back in the ski valley, the only lift operator does not have to worry about competition. If it raises prices, winter sports enthusiasts cannot switch to the ‘other lift’ – there isn't one. There is also little pressure to invest in new lifts or better service. This is the typical drawback of a monopoly: higher prices, lower quality and fewer new ideas.

A few points to keep in mind:

• A monopoly does not always arise from bad intentions. Sometimes the market is simply too small for two suppliers – a second ski lift in the same small valley would never pay for itself. The snack bar at an outdoor swimming pool has its own small monopoly too: it is the only place inside the pool grounds selling ice cream and drinks.
• Being big is not the same as having a monopoly. A large company with plenty of rivals still faces competition. What matters is whether customers can go elsewhere.
• The state takes a closer look at particularly important monopolies, such as electricity or water networks. Whether and how it should intervene in prices is a matter of political debate, and the topic of “Building an argument: Should the state regulate prices?”.

Between the two extremes of monopoly and competition lies oligopoly: a few large suppliers share the market. You know this from the major streaming services – a handful of platforms cover almost the entire market for films and series. The picture is similar for mobile network operators and sportswear giants.

There is competition in an oligopoly, but it is fragile. A small number of suppliers can easily collude: ‘Let's all charge the same high price, so none of us has to undercut the others.’ A secret agreement of this kind about prices or dividing up the market is called a cartel.

This is convenient for the companies involved, but harmful to everyone else: together, the suppliers act like a single monopoly. Customers pay too much, and the pressure to improve quality and develop new ideas disappears, even though there seem to be several suppliers. That is why cartels are banned. In Switzerland, the Wettbewerbskommission (WEKO) oversees competition and can impose heavy fines on companies that break the rules. Comparable competition rules apply in Liechtenstein through the European Economic Area (EEA).

Remember the difference: an oligopoly is a market structure and is legal. A cartel is illegal behaviour – suppliers only pretend to compete.