Functional Fixedness in understanding competition in markets

Corporate overlord here. Time to go over an interesting (maybe) economic concept. Functional fixedness is a concept in psychology in which the use of an object can only be understood by an individual in the way that that object is traditionally used. Im not sure if what im talking about can specifically be called functional fixedness, but essentially it is the same idea. When people are taught about markets and competition they tend to assume the most obvious relationships in a market are the only ones that exist. In short in a market producers compete based on cost to sell to consumers. This is econ 101 stuff. Like most Econ 101 stuff it doesn't tell the whole story. I am learning slowly to avoid arguments with people who think they understand economics because they took such a basic course. That is a story for another time of course.

Actually competition in any market can exist in three ways, or some combination thereof. Competition exists between producers and producers of course. Competition also exists between consumers and consumers (sometimes.) Now here is the one that may surprise you. Competition exists between consumers and producers! Now obviously when you go to the store to pick out a bottle of coke the clerk does not argue with you on price. This would be foolish. Here's what many people don't see about markets: behavior in aggregate can differ widely from behavior on an individual level. Now to explain this concept lets set out some terms. Internal competition is competition between members of the same group... That is to say consumers and other consumers or producers and other producers engage in internal competition. External competition is the competition between opposing groups. In short external competition is the way in which consumers compete with producers during an interaction.

A housing market is a good example for looking at some of these concepts. When there are 5 parties trying to buy the same house internal competition emerges between consumers. The price goes up. When there are 5 home owners trying to sell to two parties, internal competition emerges between producers. The price goes down. Now in either case of internal competition if one group becomes more internally competitive, the other group becomes less so. In other words, if those selling their houses have to lower prices (becoming more competitive) those buying houses don't have to offer as much (becoming less competitive.) So how does this relate to external competition? Quite simply both groups will in a way compete to try to force the other group to become more competitive, lessening internal competition. Why? Because internal competition hurts. So how may groups compete externally? Partially by controlling supply where viable. If there is a surplus of some item being offered on the market, the producers must become more competitive and lower prices. If there is a shortage the consumers must increase what they are willing to pay. It is conceivable that in some markets there may be cases of producers buying up or not releasing surplus, and or consumers dumping existing units, or not buying what they otherwise would to lower price.

Now obviously one cannot say that all three forms of competition exist in every single market. What you should get out of this is that all three forms of competition exist in some market or other. In short, yes suppliers compete with each other based on price and quality in markets. But this is not the only form of competition that exists.