Competition - Doesnt Always Lower Prices & Improve Value
The effect caused by increased competition does not only depend on how traders react to it, it also depends upon how consumers react to it.
Competition Can Reduce Prices & Increase Value
If consumers shop around for the best value, not always the same thing as the lowest prices, this rewards traders who give better value, so they tend to react by offering even better value. Traders who offer poor value become marginalised, and decline or close down.
A generation ago, supermarkets offered better value than smaller grocers. Consumers rewarded the supermarkets with their custom, and the supermarkets reacted by continuing to give better value.
Recently British supermarkets have been criticised for being relatively expensive.
Competition Is Not Always Price / Value Related
Some retailers successfully charge high prices, often through pressure selling, or selling on expensive credit terms, or by making high profits on unnecessary extended warranty insurance (we wont mention Dixons!). This means they can compete for better, more desirable, High Street locations by paying higher rents. The annual rent for a corner unit, suitable for jewellers, nearest to a Marks & Spencer store, can cost well upward of £100,000. This money has to come from somewhere, eventually from the consumer. If the better location guarantees extra sales, then it may lower operating costs for the store, who may pass on price reductions. This will only work if consumers are price or value conscious. If consumers are more status conscious, then they will tend to shop at the smartest looking, most expensive shops. the shop owners then compete with each other to spend more money on having the most expensive looking store, or the most exclusive watch brands. These may not be the best quality, because the brand owners may spend more of their budget on status and prestige promotion and advertising than on the product itself. The result is that consumers choose to buy high priced "status" goods, rather than genuinely high quality goods.
We would observe that the moral here is that consumers get the retailers they deserve!
If you want to get good value, you have to be prepared to expend some effort in finding the best value, and try to stay loyal to the suppliers who offer you good value.