Chapter 20: Problem 18

How does competition, whether domestic or foreign, harm businesses?

Short Answer

Expert verified

Competition, whether domestic or foreign, can harm businesses by causing loss of market share, decreased profits, and threats to business survival. Foreign competition can pose unique challenges relating to labor costs, regulations, and cultural preferences, while domestic competition fosters pressure to adapt and evolve in response to local economic conditions and innovation.

Step by step solution

Identify Competition Positives and Negatives

: First, it's important to recognize that competition can have both positive and negative effects on businesses. Positive effects include driving innovation, improving the quality of products and services, and lowering prices for consumers. However, the focus here is on the negative effects caused by competition. These may include the loss of market share, decreased profits, and threats to business survival.

Loss of Market Share

: One negative effect of competition on businesses can be the loss of market share. When new competitors enter the market, there is increased pressure on existing businesses to retain customers and maintain their share of the market. This can be particularly challenging if the new competitors offer similar or better products and services at lower prices.

Decreased Profits

: Competition can also lead to a decrease in profits for businesses. This may occur as a result of having to lower prices in order to stay competitive or due to increased costs associated with improving products and services in response to competition. For example, a business may have to invest in research and development or upgrade equipment to keep up with competitors.

Threats to Business Survival

: In some cases, competition can pose a threat to the survival of a business, particularly for smaller businesses or those with limited resources. If a company is unable to maintain its market share or sustain profitability in the face of competition, it may be forced to shut down or merge with another company in order to survive.

Foreign Competition Challenges

: Foreign competition can present unique challenges for businesses, such as differences in labor costs, regulations, and cultural preferences. For example, foreign companies may have lower production costs due to differences in wages, allowing them to offer products at lower prices, making it difficult for domestic businesses to compete. Additionally, businesses may need to adapt their products and marketing strategies to meet the preferences of foreign consumers.

Domestic Competition Challenges

: Domestic competition can also have negative effects on businesses. For example, new local startups may emerge with innovative ideas, putting pressure on existing businesses to adapt and evolve. Additionally, businesses may need to deal with the ebb and flow of local economic conditions, which can at times make it difficult to maintain profitability and market share. In conclusion, competition can indeed harm businesses in various ways, such as loss of market share, decreased profits, and threats to business survival. Understanding these negative impacts is important for businesses to prepare and adapt in a competitive market environment.

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