Free competition is a situation where any person or company is free to participate in a certain economic activity either as a seller or as a buyer.
When there is free competition, companies or people are free to enter or exit a market. They also have complete freedom to set the price of their products in order to attract consumer preferences. The latter, for their part, are free to choose which products they want to buy and which suppliers they want to go to.
Conditions for free competition to exist
In order for free competition to exist in a market, there must be an adequate and transparent legal framework that allows economic agents to exercise their freedoms while respecting the rights of others.
Within this legal framework, the State must have the power to:
- Investigate and sanction any economic agent that seeks to unjustifiably restrict competition. Generally, this is done through the creation of a Competition Law and a supervisory body, which is the Competition agency.
- Review and modify regulations or standards that could be restricting competition.
- Establish mechanisms for the protection of consumer rights. Generally this is done through a Consumer Rights Law and a specialized inspection body.
Benefits and drawbacks of free competition
Free competition has a beneficial effect on the economy as it encourages companies to be more efficient, innovate and constantly improve the quality of their products in order to attract consumer preference. The most competitive companies will be the only ones capable of surviving in the market and making a profit.
Competition directly benefits consumers who end up paying lower prices and can opt for more and better products than in the scenario of a monopoly or a low level of competition.
The more freedom of competition there is, the closer a market will be to so-called perfect competition.
However, we must take into account that there may be anomalies or market failures. Thus, resources are not always efficiently allocated when there is free competition.
In addition, we must take into account that there are certain sensitive sectors, such as basic services. In those cases, the price cannot be left to supply and demand because it is a public need that all citizens have access to that good.