<p>Competition "works" in capitalism in the sense that society, as a whole, is provided with the maximum possible quantity of goods for a price which gets close to the cost of producing the good.</p>

<p><a href="https://en.wikipedia.org/wiki/Microeconomics" rel="nofollow noreferrer">Microeconomics</a> studies how this works theoretically, and uses a series of <a href="https://en.wikipedia.org/wiki/Microeconomics#Assumptions_and_definitions" rel="nofollow noreferrer">assumptions</a> to make the "mathematics" simpler, such as that everyone in the market is rational (they want the maximum goods for the cheapest price), and that the goods are homogeneous (all the same, like potatoes in a veggies market for example).</p>

<p>To understand the benefits of competition, I'll compare a monopoly, where the company has a lot of power, to the perfect competition, where sellers have little power.</p>

<p><strong>Selling water in the desert</strong></p>

<p>Imagine a seller of bottled water in the desert. Let's call her <em>Carmel</em>. The seller has a cost of 1$ to buy the bottle and bring it to the desert. She also knows that 28 people pass the desert by day, and she made a study on how much each person would pay to buy water, what economists call demand. The results are here:</p>

<p><a href="https://i.sstatic.net/ZHFBl.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/ZHFBl.png" alt="Demand for bottled water in the desert at each price"></a> </p>

<p>A quick read of the chart tells her that no one will buy water for a price higher than 14, and everyone will buy it at 1. We can read all the other quantities sold for prices between 14 and 1: for instance, at a price of 6, 18 people would buy.</p>

<p>Knowing this, the water seller <em>Carmel</em> calculates the profit at each quantity in a table:</p>

<p><a href="https://i.sstatic.net/2NSGV.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/2NSGV.png" alt="Profits for the sale of water bottles."></a></p>

<p>She starts selling water for 8$ a bottle the next day, making the maximum profit possible: 98 dollars. </p>

<p><strong>For that money, I can also sell water!</strong></p>

<p>After a few days the word comes to the close-by village of <em>Oasisville</em> that <em>Carmel</em> is making 98$ a day selling water bottles to travelers in the desert. </p>

<p>Knowing that other travelers would buy bottle for lower prices, another seller decides to show up. Let's call her <em>Dromedaria</em>. Dromedaria sets the price at 6, taking all the sales from Carmel. With the loss from buying the water bottles, Carmel sets the price at 2 the next day, taking all the sales from Dromedaria. They both undercut each others' prices until the price becomes close to 1. At the end all the travelers get water and the sellers get a small profit. </p>

<p>When you think of the number of people benefiting from fresh water in the desert, the competition is giving a better outcome to society. This was achieved without government intervention (price setting), and is the simplified theoretical background for defending the free-market competition.</p>

<p>Of course this is a simplification, and in real life things would take more time, or they could collude, etc.</p>

<p><strong>Two additional points:</strong></p>

<ul>
<li>The capitalism has as a key principle the freedom for sellers (capital owners) to freely trade at privately-set prices. Competition is just a consequence of that. The opposite would be a centralised pricing approach (planned economy), such as the USSR experienced in the after 1922</li>
<li>Game theory would be the next step to try to predict what others do: how Dromedaria and Carmel would take each decision and react to each other's pricing</li>
</ul>

CC BY-SA 3.0
2017-09-17T09:35:57.127Z
"The opposite would be a centralised pricing approach, such as the USSR experienced in the after WWII" Huh? I think you got the period or the country wrong, or you have made a statement that is far weaker than it could be.
Giskard
CC BY-SA 3.0
2017-09-18T08:56:56.080Z
You are right - i meant the planned economy which started around 1922 in USSR, would you say that is correct? I can also remove that point altogether...
JoaoBotelho
CC BY-SA 3.0
2017-09-18T09:53:36.540Z
That sounds about right.
Giskard
CC BY-SA 3.0
2017-10-26T15:23:55.880Z
(+1) Good answer!  Concise and easy to understand.  
"This was achieved without government intervention..." Imagine if the government had set a price ceiling at $1; Carmel and Dromedaria would make $0 profit, and there would be no water for the desert travelers!
Mathematician
CC BY-SA 3.0
2017-09-17T03:40:03.147Z
2017-09-19T04:02:23.473Z
2017-09-19T04:02:23.473Z
JoaoBotelho
<p>I want to provide a more political aspect to the discussion by differentiating between a market economy, i.e. an economy where competition through markets is the main mechanism of creation and distribution of wealth/income, and that of a capitalist economy, defined as one where the ownership of means of production (ultimately, financial capital and equity) is mainly exercises through public limited companies.</p>

<p>I think the distinction is relevant, both from a theoretical and historical point of view. Theoretically, a market economy can exist within a pluralist range of forms of production (for example, there is a thing called <a href="https://en.wikipedia.org/wiki/Market_socialism" rel="nofollow noreferrer">Market Socialism</a>). A market economy is perfectly compatible with a legal structuring of firms as cooperatives. Just look at how the other answers were silent to the legal organisation of firms.</p>

<p>Historically, because it is a misconception from the liberal and conservative defendants of capitalism (rooted surely in Adam Smith's conception of the Invisible Hand) that competition is a natural tendency within capitalism. Evidence indicates time and time again that capitalism engenders monopolies, oligopolies, and capture of political and cultural power. It is only organised labour movements plus state intervention (many times inspired on such movements, and not emerging from capitalists self-restrain and benevolence) which put checks on capital inherent desire for power and control.</p>

<p>Thus, what I am saying is that, yes, competition works for market economies, <strong>but competition does not work for capitalism</strong>.</p>

CC BY-SA 3.0
2017-09-19T09:51:56.950Z
2017-09-19T09:51:56.950Z
luchonacho
<p>As far as I know, capitalism is based on competition: 
If two(or more) companies produce similar products that compete against other, these companies are in a competition.
Because the objective of a company is to earn as much money as possible, the company will try to maximise the selling of their product. However, because normally there are more than a single company, every company has to sell their best possible product for the lowest price without making enough profit. That leads to a situation where the consumer gets a very good product for a very fair-realistic price.</p>

<p>My problem here is, that this only works if every company only can make the decision about what price they make for what quality once. Like in the <a href="https://en.wikipedia.org/wiki/Prisoner%27s_dilemma" rel="nofollow noreferrer">prisoner's dilemma</a>.
The prisoner (the company) will (usually; if he is sane) make the decision to betray his member (-><a href="https://en.wikipedia.org/wiki/Game_theory" rel="nofollow noreferrer">Game Theory</a>).
The point is the ideal strategy changes if this 'game' will be repeated forever (is identical to a situation where nobody knows, when the game ends). The strategy any sane prisoner would take is to not betray his gang-member, however, if his member betrays him he will betray him, too, until his member does not betray him anymore.
Because this is a simplified version of a real competition, real companies should act like the prisoners: make a high price until the competitor make a low price. However, no company would make a low price because although they would make better profit in short term, the company would make better in longterm if they made the unspoken deal with the other companies.</p>

<p>So why is it not like this in real world, or is it like this and I haven't noticed that yet?</p>

CC BY-SA 3.0
2017-09-17T01:20:01.273Z
It is something of a misconception that *competition* is the critical factor behind "capitalism".  Rather, *cooperation* is far more important.  Cooperation is critically important to get anything done in a commercialized society, while competition merely serves to "fine tune" the process.
Hot Licks
<game-theory><competition><capitalism>
Why does competition work for capitalism?
Darius Duesentrieb
# Why does competition work for capitalism?

(Asked by: username_0 on 2017-09-16)

As far as I know, capitalism is based on competition:
If two(or more) companies produce similar products that compete against other, these companies are in a competition.
Because the objective of a company is to earn as much money as possible, the company will try to maximise the selling of their product. However, because normally there are more than a single company, every company has to sell their best possible product for the lowest price without making enough profit. That leads to a situation where the consumer gets a very good product for a very fair-realistic price.

My problem here is, that this only works if every company only can make the decision about what price they make for what quality once. Like in the [prisoner's dilemma](https://en.wikipedia.org/wiki/Prisoner%27s_dilemma).
The prisoner (the company) will (usually; if he is sane) make the decision to betray his member (->[Game Theory](https://en.wikipedia.org/wiki/Game_theory)).
The point is the ideal strategy changes if this 'game' will be repeated forever (is identical to a situation where nobody knows, when the game ends). The strategy any sane prisoner would take is to not betray his gang-member, however, if his member betrays him he will betray him, too, until his member does not betray him anymore.
Because this is a simplified version of a real competition, real companies should act like the prisoners: make a high price until the competitor make a low price. However, no company would make a low price because although they would make better profit in short term, the company would make better in longterm if they made the unspoken deal with the other companies.

So why is it not like this in real world, or is it like this and I haven't noticed that yet?

**Tags:** game-theory, competition, capitalism
> **Comments:**
> **username_1**: It is something of a misconception that *competition* is the critical factor behind "capitalism".  Rather, *cooperation* is far more important.  Cooperation is critically important to get anything done in a commercialized society, while competition merely serves to "fine tune" the process.  

---

## 2 answers

### Answer by username_2 on 2017-09-17. Score: 4

Competition "works" in capitalism in the sense that society, as a whole, is provided with the maximum possible quantity of goods for a price which gets close to the cost of producing the good.

[Microeconomics](https://en.wikipedia.org/wiki/Microeconomics) studies how this works theoretically, and uses a series of [assumptions](https://en.wikipedia.org/wiki/Microeconomics#Assumptions_and_definitions) to make the "mathematics" simpler, such as that everyone in the market is rational (they want the maximum goods for the cheapest price), and that the goods are homogeneous (all the same, like potatoes in a veggies market for example).

To understand the benefits of competition, I'll compare a monopoly, where the company has a lot of power, to the perfect competition, where sellers have little power.

**Selling water in the desert**

Imagine a seller of bottled water in the desert. Let's call her *Carmel*. The seller has a cost of 1$ to buy the bottle and bring it to the desert. She also knows that 28 people pass the desert by day, and she made a study on how much each person would pay to buy water, what economists call demand. The results are here:

[![Demand for bottled water in the desert at each price](https://i.sstatic.net/ZHFBl.png)](https://i.sstatic.net/ZHFBl.png)

A quick read of the chart tells her that no one will buy water for a price higher than 14, and everyone will buy it at 1. We can read all the other quantities sold for prices between 14 and 1: for instance, at a price of 6, 18 people would buy.

Knowing this, the water seller *Carmel* calculates the profit at each quantity in a table:

[![Profits for the sale of water bottles.](https://i.sstatic.net/2NSGV.png)](https://i.sstatic.net/2NSGV.png)

She starts selling water for 8$ a bottle the next day, making the maximum profit possible: 98 dollars.

**For that money, I can also sell water!**

After a few days the word comes to the close-by village of *Oasisville* that *Carmel* is making 98$ a day selling water bottles to travelers in the desert.

Knowing that other travelers would buy bottle for lower prices, another seller decides to show up. Let's call her *Dromedaria*. Dromedaria sets the price at 6, taking all the sales from Carmel. With the loss from buying the water bottles, Carmel sets the price at 2 the next day, taking all the sales from Dromedaria. They both undercut each others' prices until the price becomes close to 1. At the end all the travelers get water and the sellers get a small profit.

When you think of the number of people benefiting from fresh water in the desert, the competition is giving a better outcome to society. This was achieved without government intervention (price setting), and is the simplified theoretical background for defending the free-market competition.

Of course this is a simplification, and in real life things would take more time, or they could collude, etc.

**Two additional points:**

* The capitalism has as a key principle the freedom for sellers (capital owners) to freely trade at privately-set prices. Competition is just a consequence of that. The opposite would be a centralised pricing approach (planned economy), such as the USSR experienced in the after 1922
* Game theory would be the next step to try to predict what others do: how Dromedaria and Carmel would take each decision and react to each other's pricing

> **Comments:**
> **username_3**: "The opposite would be a centralised pricing approach, such as the USSR experienced in the after WWII" Huh? I think you got the period or the country wrong, or you have made a statement that is far weaker than it could be.  
> **username_2**: You are right - i meant the planned economy which started around 1922 in USSR, would you say that is correct? I can also remove that point altogether...  
> **username_3**: That sounds about right.  
> **username_4**: (+1) Good answer!  Concise and easy to understand.   "This was achieved without government intervention..." Imagine if the government had set a price ceiling at $1; Carmel and Dromedaria would make $0 profit, and there would be no water for the desert travelers!  

---

### Answer by username_5 on 2017-09-19. Score: -1

I want to provide a more political aspect to the discussion by differentiating between a market economy, i.e. an economy where competition through markets is the main mechanism of creation and distribution of wealth/income, and that of a capitalist economy, defined as one where the ownership of means of production (ultimately, financial capital and equity) is mainly exercises through public limited companies.

I think the distinction is relevant, both from a theoretical and historical point of view. Theoretically, a market economy can exist within a pluralist range of forms of production (for example, there is a thing called [Market Socialism](https://en.wikipedia.org/wiki/Market_socialism)). A market economy is perfectly compatible with a legal structuring of firms as cooperatives. Just look at how the other answers were silent to the legal organisation of firms.

Historically, because it is a misconception from the liberal and conservative defendants of capitalism (rooted surely in Adam Smith's conception of the Invisible Hand) that competition is a natural tendency within capitalism. Evidence indicates time and time again that capitalism engenders monopolies, oligopolies, and capture of political and cultural power. It is only organised labour movements plus state intervention (many times inspired on such movements, and not emerging from capitalists self-restrain and benevolence) which put checks on capital inherent desire for power and control.

Thus, what I am saying is that, yes, competition works for market economies, **but competition does not work for capitalism**.


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