November 30, 2023 

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The fourth of seven basic rules of the economy, stating that competition among market buyers and sellers generates an efficient allocation of resources. Competition depends on the relative number of buyers and sellers. The side of the market with fewer numbers generally has relatively less competition and more market control.
This rule stems from the fundamental observation that competition is the heart and soul of markets and efficiency. It is the essence of Adam Smith's notion that free market exchanges are guided by an invisible hand. It is also an often misunderstood notion when matters turn to public policy due to two different types of competition: (1) competition among the few and (2) competition among the many.

Competition Among the Few

competition among the few is comparable to a track and field competition among a handful of athletes--such as 100 meter sprint, pole vault, or shot put. The winner of a 100-meter sprint, for example, is merely the one who runs faster than others. The winner need not set a world record. The winner need not set a meet record. The winner need not even achieve a personal best. The winner merely needs to run faster than the others.

If the number of competitors is limited and mediocre, then the winner's performance also can be quite mediocre. In fact, a really mediocre runner can win the gold medal, if the others have injuries or obstacles to overcome (sprained ankles, shoes nailed to the track, lead underwear, gunshot wounds).

A number of markets exhibit similar competition among the few. Automobiles, computer software, television broadcasting, and airlines are just a few to note. Many win by being just a little bit better than their rivals. Not the best car, just a better car. Not the absolute best airline, only a little better. Are the "winners" in these markets world record holders or just barely mediocre?

The bottom line is that competition among the few does not necessarily achieve an efficient allocation of resources. It does not necessarily provide the highest level of satisfaction from available resources.

Competition Among the Many

Competition among the many is the sort of competition that economists preferred to see in a market. In contrast to a track and field competition among a handful of athletes, competition among the many is more like a road race with thousands of runners, such as the New York marathon. Competitors in this race cannot aim for mediocrity and expect victory. One runner cannot count on sprained ankles, lead underwear, and gunshot wounds to hinder EVERY other competitor.

Competition among the many in a market does generate an efficient allocation of resources. Competition among many buyers forces the market price up to the maximum demand price they are willing to pay. But simultaneously, competition among many sellers forces the market price down to the minimum supply price that sellers are willing to accept. Equality between these prices generates efficiency.


Some implications of the fourth rule of competition are:
  • First, competition among the many does generate an efficient allocation of resources. If the demand price and supply price are equal, the satisfaction of wants and needs--value received from a good--is equal to the opportunity cost of production--value given up. With this equality, the change in resource allocation cannot generate a greater level of satisfaction.

  • Second, the lack of competition on one side of the market or the other, not only results in an inefficient allocation of resources, but also creates markets with specific names. At the extreme end, monopoly is a market with no competition among sellers and monopsony is a market with no competition among buyers. Oligopoly is a market with limited competition among sellers and oligopsony is a market with limited competition among buyers. There is also monopolistic competition which is a market with a lot, but not perfect, competition among sellers and monopsonistic competition is a market with a lot, but not perfect, competition among buyers.

  • Third, violation of the fourth rule of competition is a key market failure that attracts government scrutiny. The primary policies designed to improve competition are termed antitrust laws. However, due to the fifth rule of imperfection, governments do not necessarily intervene in uncompetitive markets. The correction can be worse than the problem.


Recommended Citation:

FOURTH RULE OF COMPETITION, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2023. [Accessed: November 30, 2023].

Check Out These Related Terms...

     | seven economic rules | first rule of scarcity | second rule of subjectivity | third rule of inequality | fifth rule of imperfection | sixth rule of ignorance | seventh rule of complexity |

Or For A Little Background...

     | efficiency | satisfaction | opportunity cost |

And For Further Study...

     | economic goals | three questions of allocation | consumer sovereignty | economic thinking | incentive | free enterprise | laissez faire | invisible hand | government functions | political views |

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