Four Models of Competition and their Implications for Marketing Strategy

Economic Models of Competition
 
The economic models of competition begin with the 
idea of exchange between buyers and sellers as a way 
to increase or create utility for each party. Buyers and 
sellers enter an exchange in fundamentally different 
positions in terms of assortment utilities that each party 
possesses. Both parties leave an exchange in improved 
positions—the buyer's position is improved by an ad-
dition to his assortment of goods and experiences; the 
seller's in terms of more money or other assets. In short,
 
3
 

---

exchange is motivated by perceptions of increases in the 
utility or value of post transaction assortments pos-
sessed by buyers and sellers.
 
Competition associated with an exchange occurs 
between buyers and sellers, within the set of buyers, 
and within the set of sellers. Buyers and sellers naturally 
compete with each other in the course of an exchange, 
each party attempting to capture greater value at the 
expense of the other. In India, one only has to visit a 
local market to experience this kind of competition; in 
the US, one sees it widely in industrial markets and in 
consumer markets for automobiles, houses, and 
selected services. Buyers sometimes compete with each 
other, again in industrial, consumer, and other markets 
at locations around the world. Shoppers in Moscow 
competed vigorously for scarce consumer goods imme-
diately before the recent recall of the ruble. India and 
China competed for $ 120 million in investments made 
by Motorola, Inc.
 
While competition between buyers and sellers and 
competition between buyers is fundamental, the focus 
of this paper is on competition between sellers. 
Economic models of competition between sellers take 
one of-five forms, depending on the number of com-
petitors and degree of product homogeneity (Eliash-
berg and Chatterjee, 1985). Models reflect three types of 
market structure based on the number of competitors: 
one seller (monopoly), a few sellers (oligopoly), and 
many sellers. Models recognize two different types of 
products: homogeneous and differentiated. When the 
two dimensions are arranged as in Figure 1, the five 
different types of economic models of competition 
emerge.