topic 4
Pure Competition (Perfect Competition)
simplest market structure
large number of firms
essentially the same product
approximately the same price
market is an equilibrium
each firm produces so little of a product that compared to the total supply so no single firm can greatly influence price. the only decision made is to choose how much their production costs and the market price.
few industries meet all conditions for pure market competition. the conditions for a pure competition market to exist:
many buyers and sellers
identical/ similar products
well informed buyers and sellers
easy entry and exist
pure competition markets require many firms and customers. this condition helps install the inability to control price.
supply and demand interact to determine both price and output.
identical products is important because there’s that competition aspect to it. a product that’s considered the same regardless of who makes or sells it is called a commodity. buyers will always choose the supplier with the lowest prices.
markets should provide the buyer full information about the features of a product and its price. for effectiveness, both buyers and sellers have clear incentives.
easy entry and exit allows the number of firms to be high, therefore competition.
barriers to entry involve:
high start up costs
complex technology
many people cannot afford to launch a business. technology may allow some people to bypass the struggle and make an unfair route, leading to a market not being purely competitive.
purely competitive markets are efficient. competition keeps market prices and production costs low. prices may accurately reflect how much their market input into their production process. prices in a purely competitive market are the lowest sustainable prices possible.
producers earn highest profits when they produce enough that their cost to produce one more unit exactly equals the market price of the unit. due to no market being influencing enough to control or dominate prices, the output decision is based on their most efficient use of production. output in a purely competitive market will reach the point where each supplying firm covers all the costs and earns only the minimally acceptable profit.
Monopolies
entry barriers
one seller, many buyers
unique product
(alternatives exist, though)
monopolies take advantage of their dominance and power and tend to charge extremely high prices because no one else may sell their product. this is because of government regulations which offers patents to products: no one is legally allowed to copy their product by any means.
economies of scale are characteristics that cause a producer’s average cost to drop as production rises. markets with economies of scale is like saying, “bigger is better.”
a natural monopoly is a market that runs most efficiently when one large firm provides all of the output. however, technology can destroy a natural monopoly.
a government monopoly is a monopoly created by the government. governments may allow monopolies to form naturally or helping them form by regulating it. government actions can create barriers to entry in markets, thereby creating markets. one way is by issuing a patent: the giving of a company exclusive rights to sell a new good or service for a specific period of time. this forbids other firms from copying their product by making it illegal doing so.
governments may aid in forming monopolies because patents guarantee companies profit from their own products without competition. patents encourage firms to research and develop new products. by the government encouraging patents, innovations can be made, supporting society as a whole.
franchises are contract issued by a local authority that gives a single firm the right to sell its good within an exclusive market. franchises are granted rights to sell a product; permission. on a larger scale, governments can issue a license: firms’ right to operate a business.
sometimes governments can restrict the amount of companies allowed in one industry.
output decisions would end in resulting profits that would give the company a reason or incentive for inventing a new product. you either choose output or price. monopolies may produce fewer goods for a higher price.
the monopolists dilemma is when they must lower prices to sell more.
price discrimination is when you charge a different price depending on which group a buyer is coming from. different levels of a product are made to be presented to differing levels of people who are willing to pay this much or that much for something.
market power is the ability to control prices and total market output.
Monopolistic Competition and Oligopoly
open market
large competition, but few
similar products
production of substitution goods
there are four general conditions to determine a monopolistic competition:
many firms
few artificial barriers
little control over prices and total
differentiated products
yes, you’d need many firms, but in monopolies competition, you just need a handful of large firms, instead of several small ones competing in a pure competitive market.
patents don't protect companies from competitors. producers cannot collude to keep out other competition.
little control over prices is because of competition. companies can control their price all they want, meaning they can increase or decrease all they want, but buyers will substitute with another company.
differentiation enables monopolistically competitive sellers to profit from the differences between their products and other competitor products.
non-price competition is competition that’s not about the price.there exists other ways to have buyers prefer your product, whether it’s more expensive or not:
physical characteristics
location
service (social)
advertising
convenience
an oligopoly is a market dominated by a few large, profitable firms. many companies dominate an industry at once and not just one or several many firms.
price wars occur when competitors cut their prices very low to win business.
collusion refers to an agreement among members of an oligopoly to illegally set prices and production levels. price fixing is one outcome of a collusion which is an agreement among firms to sell at the same or very similar prices. collusion occurs to drive out another competitor by colluding and teaming up with others.
cartels is a stronger form of collusion and it’s an agreement by a formal organization of producers to coordinate prices and production. cartels only survive id every member keeps to its agreed-upon output levels. countries and international organizations permit cartels, but they’re illegal in the U.S.
Government Regulation and Competition
predatory pricing is the act of controlling pricing and output like a monopoly, which leads to the formation or merges of firms. in short, it’s when businesses set prices unbelievably low go to eliminate competition and gain market share.
antitrust laws exist because of the federal government’s distrust for businesses not controlling the price and supply of important goods. this ensures that there’s no unfairly force out of a competitor.
a trust is a business combination similar to a cartel.
a merger occurs when a company joins another company or companies to form a single firm. government regulators make sure mergers weren’t formed to lead to unfair market control.
deregulation means the government no longer decided what role each company can play in a market and how much it can change its customers. this allows businesses to operate more freely, which can stimulate the economy and create more competition.