Characteristics and Behaviors -- Firms and Decisions

natural barriers to entry for firms

• high capital overlay

• Economies of scale

artificial/contrived barriers to entry for firms

• aggressive marketing and advertising or limit pricing

• legal barriers such as licenses, permits, patents and copyrights by gov

high capital overlay

initial capital required to set up the firm when entering the industry

prevents new firms from entering if they lack sufficient funds to do so

economies of scale

existing firms with high market share enjoy internal EOS which will lower their cost of production hence they can charge lower price for products

new firms do not enjoy same EOS which prevents pricing at the same rate and consumers will not switch over to more expensive products

aggressive marketing and advertising

existing brands can conduct marketing and advertising that will create brand loyalty to their products

limit pricing

existing firms price their goods at lower prices, typically below their rival’s average cost of production

legal barriers

licenses, permits, patents and copyrights cost a high price to obtain

copyright

existing firms may hold patents or copyrights which prevents competitors from selling similar products unless they pay the existing firms a licensing fee to produce similar products under patents or copyrights

MONOPOLY CHARACTERISTICS

• extremely high barriers to entry (both natural and artificial)

• ONE dominant firm in the market

• product is unique in nature with no substitutes

• lack of knowledge regarding the product’s price and production costs

PERFECT COMPETITION CHARACTERISTICS

• no barriers to entry and no restrictions

• many firms with no significant share of total market output

• identical products that are perfect substitutes

• perfect information where every seller knows the price and production costs of its rivals, market costs and all available production technology

• buyers also have complete information about each and every seller’s price, the quality and availability of its products. firms selling goods above market price will not be able to sell goods to buyers

MONOPOLISTIC COMPETITION CHARACTERISTICS

• weak barriers to entry

• many firms with each firm having a small share of total market output

• all firms produce nearly identical products with minimal differentiation or variety

• sellers have some knowledge of the price and production costs of its rivals, market costs and available production technology

• buyers can also have some information about each and every seller’s price, the quality and availability of the products

OLIGOPOLY CHARACTERISTICS

• high barriers to entry

• few firms, each with a significant share of total market output

• some oligopolistic firms produce non-identical products with some differentiation or variety compared to their rivals, but these products are not perfect substitutes of each other