Competition in a market economy plays a decisive role, and this role was generalized by A. Smith in his “invisible hand” principle. According to this principle, each individual business entity, seeking benefits for himself, regardless of his own will and consciousness, is guided by the so-called “invisible hand” of the market to achieve benefits and benefits for society as a whole.
Since the income of producers is directly dependent on how satisfied the interests of consumers are, there is competition in the economy for the limited solvent demand that exists in this market segment. And the totality of all commodity producers, as if controlled by an "invisible hand", of their own free will and effectively embodies all the interests of society, without realizing it. Indeed, competition in the economy creates conditions under which people produce what they can, those who can produce better or cheaper than others, and sell at a price lower than that which one of those could appoint who does not produce this product.
The word competition means:
1) From the Latin word concurrencia, which translates as “collide” - rivalry for the most efficient use of natural and human resources.
2) The struggle for the affordable volume of consumer goods that can be paid for goods, which is waged in all those market segments, accessible to these firms.
3) Competition in the economy is a counterweight to individualism in it.
Competition methods are more modern technologies, variety of assortment, service, more selling advertising, higher quality of goods, lower prices. The subjects of the economy are firms, and the object is the volume of limited solvent demand.
Competition in the economy depends on the growth rate of demand, the use of new competitive methods of struggle, an increase in the number of participants in the game. It contributes to the evolution of a market economy.
What functions does it perform:
1) Comparative. Competition in the economy is a universal tool for comparing production efficiency by different firms of the same product. Firms whose production costs exceed market prices for this type of product become bankrupt. And those with fewer profits. In the case when the costs are equal to the market price, only the costs of resources are reimbursed, but there is still time to change the situation for the better.
2) Regulation. In order to withstand competition, the company must produce those goods that are currently in demand in the market, which means that resources are redirected to those industries whose product is most in demand at the moment.
3) Motivation. Companies offering better products or at a lower price make a profit, and those that are not able to provide a decent quality or price get out of the game.
4) Innovation. In the course of competition, the one who has more diverse and high-quality products will win, which means it makes sense to introduce various innovations.
5) Control. The economic strength of any company is controlled by competition. The economy of a country moving along a market path is developing due to natural selection among market participants.
6) Optimization. It provides the maximum level of utility for the consumer and the maximum level of profit for the manufacturer, which means that in the market it forms a state of stable social optimum.
But competition has a negative effect:
1) It enhances spontaneity and undermines stability.
2) There is a risk of creating, on the basis of the most successful firms, monopolies that can control not only the economic situation, but also, eventually, the political one, that is, form the institution of the oligarchy.
Therefore, for the stability and prosperity of society, a market economy system is necessary, but with strict state control, the best example is the Chinese economic miracle, where there is free competition, but public executions for corruption, as an attempt to build oligarchic structures.