In a competitive market, firms are expected to compete. We have assumed so far in our market model that firms compete on price only. This is not the case in the real world. Firms may compete on the basis of:
as well as price.
The world of competition can be fierce and dynamic. Highly competitive firms continually try to improve their position in the market by producing better, more reliable goods and services, to ensure that they are providing products that are better than their rivals, for example. They ultimately want to increase their profit. They will look at their production processes and may try to reduce costs and to increase revenues.
They will only do this if they can get something from it, and that something is profit. Unless there is a financial return they will not invest in any improvements. Why should they?