Two views of competition

Two views about competition exist. The first sees competition as a process for allocating resources to their optimal uses. The price mechanism is the instrument for achieving this goal, and when it functions properly, equilibria emerge with prices equated to marginal social costs of production. When it malfunctions, equilibria exist with some prices above marginal costs, and society suffers a welfare loss from the underconsumption of these goods. Such malfunctions are usually attributed to an insufficient number of buyers or sellers. Monopoly is seen as the antithesis of competition. Thus, under the first view, competition is seen as a process for determining prices and quantities, the allocation of resources for a given set of tastes and technological opportunities. At its zenith, competition produces an equilibrium set of prices that induce a Pareto optimal allocation of the economy's goods and services. Such equilibria are anticipated so long as monopolistic elements are absent.

The other view of competition sees it not as a process for allocating a given stock of resources but as a process for transforming these resources into new products and production techniques. Competition takes the form not of lower prices for an existing set of products but of new and improved ideas, and these in turn are the property of the individuals) who created them and his/her/their employer. In the first instance, competition for a new product is competition for a newly created monopoly. With time the monopoly disappears as other firms imitate and improve upon the new product.