Rivalry among businesses and service industries is called competition. This feature of a market economy encourages business to improve their goods and services, keep their prices affordable, and offer new products to attract more buyers.

There are four basic types of competition in business that form a continuum from pure competition through monopolistic competition and oligopoly to monopoly. At one end of the continuum, pure competition results when every company has a similar product. Companies that deal in commodities such as wheat or corn are often involved in pure competition. In pure competition, it is often the ease and efficiency of distribution that influences purchase.

    In contrast, in monopolistic competition, several companies may complete for the sale of items that may be substituted. The classic example of monopolistic competition is coffee and tea. If the prices of one perceived as too high, consumers may begin to purchase the other. Coupons and other discounts are often used as apart of a marketing strategy to influence sales.

    Oligopoly occurs when a few companies dominate the sales of a product or service. For example, only five airline carriers control more than 70% of all tickets sales in the United States. In oligopoly, serious competition is not considered desirable because it would result in reduced revenue for every company in the group. Although price wars do occur, in which all companies offer substantial savings for customers, a somewhat similar tendency to raise prices simultaneously is also usual.

    Finally, monopoly occurs when only one firm sells the product. Some monopolies have been tolerated for producers of goods and services that have been considered basic or essential including electricity and water. In these cases, it is government control, rather than competition, that protects and influences sales. The following chart represents the compettion continuum.

(Taken from: BARRON'S Practice Excercises for The TOEFL 6th Edition, 2007)

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