Economists extol the importance of competition in markets for driving prices down and quality up. But what is “competition” and how does it actually work?

To non-economists, the word conjures the idea of something like a sporting contest, where there can be one winner while everyone else loses. But this comparison fails on at least two dimensions.

First, for there to be a single “winner” in a market exchange would require there to be a single, identical good that each competitor is trying to provide, vying for scarce consumer dollars. This is a fine thought-experiment for the classroom, textbooks, and academic papers. But that is not how market exchanges really work, even for any particular good. While it is true that important lessons can be learned from these abstractions and thought experiments, go ahead and tell someone with discerning taste that Coke, Pepsi, and RC Cola are “basically the same” and let me know their reaction.

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