Tertiary education program

Promoting efficiency

Competition and consumer laws were created to enhance the welfare of Australians by promoting competition and fair trading. This in turn encourages efficiency, or the use of resources in the way that best benefits society, and stimulates economic growth.

Competitive markets and efficiency

Competitive markets encourage businesses to achieve efficiencies in different ways, as this enables them to attract customers away from their rivals.

For example, consider a market for portable music devices. Suppose the most desirable portable music device is an MP3 player as it is the most modern, innovative and current device on the market.

Imagine that many companies making MP3 players exist in this market, and there are a lot of people wanting to buy MP3 players. If you work for Competitive Music, a company selling MP3 players, you will find that competitive market forces will encourage Competitive Music to seek efficiencies. This can be done, for example, by:

  • Allocating production resources efficiently to different goods and services: these days, most consumers want to buy MP3 players, instead of outdated CD players. Because of this, Competitive Music will probably earn more profits if it makes mainly MP3 players, and may lose money if it makes CD players that consumers don't generally want. In this way, competitive market forces can direct Competitive Music to make products that consumers want in the amounts that they want them, and to sell them at competitive prices. This means that society's scarce productive resources are more efficiently used among all their different alternative uses, in a way that reflects consumers' tastes and wants. This is known as allocative efficiency.
  • Reducing wasteful processes: if Competitive Music can reduce the cost of producing its MP3 players, then it can pass those savings on to its customers by lowering the final price of the goods. Another business that doesn't bother cutting the waste from its production will need to sell its MP3 players for a higher price, and its customers will probably choose to buy MP3 players from Competitive Music at more competitive prices instead. This is known as productive efficiency.
  • Investing in new technology: people love MP3 players, but what if Competitive Music could come up with a better product, like a smart phone that has the function of a MP3 player, a phone and a camera? In this example, if Competitive Music was the only business in the market, it would have no incentive to invest in this new technology – people will buy its MP3 players because they have no other choice. But in a competitive market, producing a new, desirable product is a way of achieving efficiency and gaining an edge on your competitors. This is known as dynamic efficiency.

In the absence of competition, the types of efficiencies described above may be lost. For example, if a firm has strong market power, this can interfere with the efficient allocation of resources. You can see that a competitive market that encourages the pursuit of efficiencies provides benefits for everyone – a larger number of companies are able to get a slice of the pie in a competitive market, and consumers are able to purchase the goods they want at the best price.

Noted Austrian economist Joseph Schumpeter (1934) argued that the process of 'creative destruction' is a crucial one to the effective functioning of a modern economy. Firms compete against each other, and those who can offer the most relevant, cost-effective products or services will succeed, whilst others fall by the wayside.