Firms, Competition And Markets

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Firms, Competition And Markets

  1. 1. Firms, Competition and Markets
  2. 2. Competition <ul><li>Competition is the primary mechanism that ensures firms remain accountable to consumers </li></ul><ul><li>Two types of competition: </li></ul><ul><ul><li>Price: lower the price, higher the sales (in general) </li></ul></ul><ul><ul><li>Non-Price: competing on anything other than price (quality, style, customer service, location etc.) </li></ul></ul>
  3. 3. Market Structure <ul><li>The structure of the market in which a firm operates influences its decisions regarding price and output </li></ul><ul><li>Five Factors: </li></ul><ul><ul><li>Number and size of firms </li></ul></ul><ul><ul><li>Product similarity </li></ul></ul><ul><ul><li>Control over price </li></ul></ul><ul><ul><li>Ease of entry and exit of market </li></ul></ul><ul><ul><li>Amount of non-price competition </li></ul></ul>
  4. 4. Market Structure Many Firms One Firm Perfect Competition Monopolistic Competition Oligopoly Monopoly
  5. 5. Perfect Competition <ul><li>Many buyers and sellers such that individual firms have no control over total price </li></ul><ul><li>Fims sell a standard product </li></ul><ul><li>Producers must accept the market equilibrium price (price taker) </li></ul><ul><li>Relatively easy to enter and exit the market </li></ul><ul><li>Little non-price competition </li></ul><ul><li>Success depends entirely on managing costs </li></ul><ul><li>Most efficient firms will make a profit </li></ul><ul><li>If profits are high more firms enter the market, supply increases and profits decrease </li></ul><ul><li>In reality – does not exist </li></ul>
  6. 6. Monopolistic Competition <ul><li>A substantial number of firms </li></ul><ul><li>Firms sell a similar but not identical product </li></ul><ul><li>Individual firms are large enough to influence total supply, have some influence over price </li></ul><ul><li>Relatively easy for a new firm to start up </li></ul><ul><li>Price competition is significant </li></ul><ul><li>Prevalent in service and retail industries </li></ul><ul><li>Use of product differentiation to create brand loyalty </li></ul>
  7. 7. Oligopoly <ul><li>Market dominated by a few very large firms </li></ul><ul><li>Firm’s ability to set prices varies from slight to significant </li></ul><ul><li>Significant financial and other barriers to entry exist </li></ul><ul><li>Non-price competition can be intense </li></ul><ul><li>A common pricing strategy among oligopolists may occur </li></ul><ul><li>Collusion: secret agreement among firms to set prices, limit output or reduce or eliminate competition </li></ul>
  8. 8. Monopoly <ul><li>One firm has complete control over the market </li></ul><ul><li>Firm produces a unique product with no close substitute </li></ul><ul><li>Firm is a price maker – by changing supply it can set whatever price maximizes profit </li></ul><ul><li>Major barriers to entry prevent other firms from entering market </li></ul><ul><li>No need for non-price competition </li></ul><ul><li>Some products (e.g. those with high fixed costs) are better produced by a monopoly </li></ul>

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