Competition is seen as a state which produces gains for the whole economy, through promoting consumer sovereignty. It may also lead to wasted (duplicated) effort and to increased costs (and prices) in some circumstances. In a small number of goods and services, the cost structure means that competition may be inefficient. These situations are known as natural monopoly and are usually publicly provided or tightly regulated. The most common example is water supplies.
Three levels of economic competition have been classified:
- The most narrow form is direct competition (also called category competition or brand competition), where products that perform the same function compete against each other. For example, a brand of pick-up trucks competes with several different brands of pick-up trucks. Sometimes two companies are rivals and one adds new products to their line so that each company distributes the same thing and they compete.
- The next form is substitute competition, where products that are close substitutes for one another compete. For example, butter competes with margarine, mayonnaise, and other various sauces and spreads.
- The broadest form of competition is typically called budget competition. Included in this category is anything that the consumermight want to spend their available money (the so-called discretionary income) on. For example, a family that has $20,000 available may choose to spend it on many different items, which can all be seen as competing with each other for the family's available money.