Econ chapter 7 Market Competition

Competition

one of the 5 pillars of free market enterprise

keep price lowers & more/better products

2 types of highly competitive competitions

1. Pure/perfect competition

2. Monopolistic competition

Perfect Competition Characteristics

1. Many buyer and seller act independently

2. sellers offer identical products

3. Sellers can enter and exit the market easily

4. No control over price

Commodity

a product is the same no matter who produce it

Benefits of perfect competition

1. Producers need to be efficient — sell at equilibrium prices, max profit + no wasted resources

2. Supply and demand (market) determine prices, consumers pay what product is worth — firms know what to produce/sell

Why is product differentiation important

It increases demand which increases your profit — increases your quantity that you sell while also increasing price due to demand (shifts right on quantity demand curve)

Difference between monopolistic and perfect

Perfect is identical products while Monopolistic is similar products

Perfect no one firm has market control while Monopolistic has one firm dictates the price and supply levels

Product Differentiation

need to differentiate your product from competition with the goal of increasing profit

Monopolistic Competition Characteristics

1. Many buyer and seller

2. Differentiated products

3. Few barriers to entry

4. some control over price

Non price competition of Monopolistic

1. Physical characteristics

2. Service

3. Location

4. Status and image

Oligopoly Competition Characteristics

1. Few large sellers

2. Other sellers offer identical/similar products

3. Other sellers cannot enter the market easily; high start up cost, level of technical knowledge, brand competition have more control, brand loyalty

4. Some control over prices

Interdependent pricing

response to pricing of competitors

Price leadership

large seller settle prices, if other follows — price lower?. If others don’t — price drops (as in price not used i think)

Price war

sellers undercut other prices in attempt to gain market share (good for customer at first but if companies go out of business, not good)

Collusion

sellers secretly set production levels or prices (so prices go up) illegal!

Cartels

Informal agreements to coordinate production

Monopoly Competition Characteristics

1. One producer

2. Unique product — no substitutes

3. High barriers to entry

4. Control over prices

5 types of legal monopoly

1. Resource monopolies — single producer owns/control a key natural resource (others cannot enter b/c no access to product)

2. Government monopoly — gives exclusive right to company ( water, sewer i.e public interest)

   public franchise, patents & copyrights

3. Natural monopolies — competition is inconvenient and impractical (more efficient for one seller i.e PG&E)

4. Geographic monopolies — where it is located, no other around (limited area i.e reservations)

5. Technological monopolies — b/c tech is the on

Limits to Monopoly pricing

1. Consumer demand — increase price, lower demand

2. Potential competition — if have large profit, others want to jump into market (increase price, increase supply)

3. For regulations (suing)