(ii) “Competitive markets promote innovation”. What are the arguments for and against this statement?
Points on how competitive markets promote innovation are :
1. In a competitive markets there are many firms, therefore to succeed firms have to work very hard to attract customers through innovation and developing better services/products offering more variety and choice e.g. the internet is quite competitive but firms offer different services and products .
2. If firms are inefficient (uncompetitive) then they can easily make a loss, therefore, there is incentive to innovate new ideas and products to attract customers e.g. telecommunications – mobile phones with diverse features and accessories and in a monopoly there is less incentive because they have an “easy life”.
Points that competitive markets hinder innovation are :
1. If markets are too competitive, profits will be low, therefore firms cannot spend on research and development, to develop new products, therefore innovation will be low.
2. Competition implies good exchange of information between customers therefore new products could be copied (in perfect competition this will occur), so to innovate you need an incentive e.g. patent law as a barrier to entry, therefore this is not competition.
Overall competition can promote innovation but is not always the case in reality as a lot has come from monopolies e.g. Microsoft and drug companies.
A competitive market involves many firms supplying a good and the consumer will be aware of the lowest prices and best goods. Therefore to succeed firms have to be efficiietn
Definitions for reference:
1. Innovation (noun) – 1. something newly introduced, such a new method or device
2. A competitive market is a market with many buyers and sellers, free entry and exit i.e. new firms must be able to easily enter It and the firms are ‘price takers’ e.g. they can’t set prices to what they want but they have to accept the market equilibrium price where supply equals demand.
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