10 Competition

Competition is fundamentally about contending with rivals to capture and retain customers. This contest is not merely a battle for market share; it is a critical determinant of a company’s overall performance and long-term viability. The demand a business creates with its product or service defines its ability to attract and keep customers.

At its core, competition in business is a zero-sum game for customers—every customer won by one firm is a loss for another. However, the real battleground is profitability. Successful firms don’t just capture customers; they find ways to keep them while maximizing profit.

To understand competition effectively, we must go beyond simple textbook models. Real-world firms rarely operate in pure monopoly or perfect competition. Instead, most businesses compete in an oligopoly, where a few firms shape the market and respond strategically to each other. This chapter explores what that means for entrepreneurs and why Bertrand competition—where firms compete on price—is the most relevant model for startups and growth-stage companies.

10.1 Competitive Extremes: Monopoly vs. Perfect Competition

Entrepreneurs Dream of Monopoly, but It Rarely Lasts

A monopoly is the ideal scenario for a business: one firm controls the market, sets its own prices, and faces no direct competition. Peter Thiel (2014) famously encourages entrepreneurs to seek monopolistic positions, using innovation, branding, and market dominance to insulate themselves from competition.

However, true monopolies are exceedingly rare. Even when firms create something new, competitors follow.

Google may dominate search with over 90 percent market share worldwide, but it still has competitors like Bing and DuckDuckGo.
Tesla once had a near monopoly Tesla once had a monopoly on the EV market, but competitors quickly emerged. By 2024, Tesla’s U.S. market share dropped below 60% as legacy automakers introduced their own EV models.

Even when you create a new market, competition will follow.

For most startups, a lasting monopoly is a pipe dream. The real challenge is navigating competition in oligopolistic markets, where rivals react to every move.

Entrepreneurs in Perfect Competition Are Living a Nightmare

At the other extreme, perfect competition describes markets with many small firms selling identical products—think of small farmers selling wheat or corn. In this setting, no firm has pricing power, and competition between firms drives profits to their minimum.

Many Amazon E-commerce third-party sellers offer the exact same products as their rivals and undercut each other on price, leading to razor-thin margins. As long as they continue to sell the same things as other sellers, there is no way to grow margins and profit.

For an entrepreneur, perfect competition is a death trap. If you enter a market where everyone sells the same thing at the same price, you have no control over your business. While it’s crucial to understand the dynamics of perfect competition, as an entrepreneur, steering clear of such markets is advisable.

🔎 For a deeper dive into why perfect competition leads to low profits, see the supplementary document on perfect competition.

Alert Entrepreneurs Compete in the Reality of Oligopoly

Most entrepreneurs find themselves in oligopoly markets, where a small number of firms dominate and strategic interactions matter. Unlike perfect competition, businesses in an oligopoly can influence prices, differentiate products, and shape consumer choices.¹

Apple may appear to behave as a monopoly, charging $1,200 for an iPhone while rivals like Samsung and Google offer similar specs for less. But customers have choices, and Apple continuously innovates to differntiate the iPhone experience to justify its prices compared to rivals. Its differentiation—brand prestige, ecosystem lock-in, and design—gives it pricing power, but competition is always lurking.
Many luxury brands create the illusion of monopoly, but they still compete against alternatives (e.g., Omega vs. Rolex, Lamborghini vs. Ferrari).

Oligopoly is the competitive reality for startups. Even if you begin with a new, innovative product, competitors will emerge. Success depends on understanding how to compete strategically, whether through pricing, differentiation, branding, or innovation.

10.2 Monopolistic Competition: The Comforting Illusion

Many businesses behave as if they are monopolists, setting prices and strategies without paying much attention to competitors. This mindset is encouraged by monopolistic competition, an economic framework where firms assume they have pricing power due to product differentiation.

However, competition still exists and matters. Even if a business thinks it has a monopoly, customers are aware of alternatives, and rivals will react.

In the previous book part on Profit, we explored demand, revenue, costs, and break-even analysis—implicitly assuming monopoly conditions. That assumption holds in cases where:
1. A firm has created a temporary monopoly through innovation or branding.
2. Customers perceive a product as unique enough to justify higher prices.
3. Competitors are too weak or inattentive to respond effectively.

But this illusion is short-lived. Most entrepreneurs quickly find themselves in an oligopoly, where competitors fight for market share, and pricing power is limited.

The Takeaway: Entrepreneurs should use monopolistic competition thinking as a tool for differentiation, not as an excuse to ignore competition. The more a firm assumes it has monopoly power, the more vulnerable it is to being blindsided by real competitors.

10.3 The Realities of Competing on Price

Avoid the Quicksand of Price Competition

Successful companies continuously strategize to captivate their target customers. One common approach is enhancing product value through innovation and effective branding. However, a more direct and often perilous route is through price competition—lowering prices to divert customers from competitors. This method, while immediately impactful, can trigger a chain reaction of price matching or undercutting by competitors, culminating in a harmful price war. The more they compete, the further they sink into price wars. Such wars often result in selling similar quantities but at continually decreasing prices, eroding profits for all involved.

The Inevitability of Competing on Price

Despite the evident risks of price competition, it’s crucial to acknowledge a fundamental truth: all firms, in one way or another, compete on price. The pricing decisions made by businesses significantly influence customer purchasing choices, thus determining the demand for their products. Price considerations remain paramount even when a company’s focus is on non-price factors like product features or brand allure. The challenge lies in strategically setting prices that optimize profit without igniting a price war.

Extend Strategic Focus to Pricing and Beyond

Our goal is to master the art of competing effectively while not solely relying on price. This requires a keen understanding of oligopoly markets, particularly in contexts where the temptation to engage in price battles is strongest. We delve into the concept of undifferentiated Bertrand oligopoly, where the allure and risks of pure price competition loom large, and contrast it with differentiated Bertrand oligopoly. In the latter, product differentiation plays a pivotal role, offering avenues to sidestep a battle centered only on price.

Diverse Customers Prefer Diverse Products over Lower Prices

The idea that a race to the lowest price benefits customers seems appealing, especially in markets with undifferentiated products. It suggests a scenario where everyone gets exactly what they want at the lowest possible price. However, this notion overlooks a critical aspect of consumer behavior: heterogeneity in customer preferences. Customers often seek varied products that cater specifically to their unique needs. In such a diverse marketplace, the lowest price for a one-size-fits-all product is rarely the most attractive option. This is true even in segments with limited incomes, where the demand for variety and specificity remains robust. Therefore, a market thriving on serving customer diversity often trumps one racing to the bottom in pricing, especially in meeting the nuanced needs of a varied customer base.

10.4 Bertrand Competition Is Most Relevant for Entreprneurs

The most relevant form of competition for entrepreneurs is Bertrand competition, where firms compete on price. All of our analytics of competition will be built on two forms of price-setting oligopoly:

Undifferentiated Bertrand: The Danger of Pure Price Wars

When products are identical, price wars are unavoidable.
Profits are driven to zero as firms undercut each other.
This is not a viable strategy for startups.

Differentiated Bertrand: The Strategy of Smart Startups

Differentiation creates pricing power.
Entrepreneurs should focus on branding, product features, and loyalty programs.
Instead of competing purely on price, create customer preference for your product.

The Key Insight: Startups must find a way to avoid pure price competition or differentiate to justify higher prices.

10.5 Conclusion: Winning the Competitive Game

Competition is inevitable, but smart entrepreneurs shape how they compete.
Avoid perfect competition, build differentiation, and be strategic about pricing.
The next chapters will explore undifferentiated Bertrand competition where price wars dominate and differentiated Bertrand competition where branding and strategy win.

There are many forms of oligopoly competition where firms compete on different variables such as quantity, price, timing, and product differentiation. We will not consider the other forms of oligopoly here because Bertrand oligpoly is most relevant to entrepreneurship. For a broader perspective on the types of oligopolistic competition, see the supplementary chapters on Cournot oligopoly, Stackelberg Oligopoly, and collusion.↩︎