Highly Competitive Markets

Intro: Highly competitive markets provide consumers with a wide range of products that are priced lower.

Supply/Demand determine what products are produced and available.Two types of highly competitive markets:• Perfect competition• Monopolistic competition

Perfect Competition

Perfect Competition—is an ideal market structure in which buyers and sellers each compete directly and fully under the laws of supply and demand.

Nothing prevents competitionNo one buyer/seller controls demand, supply, or prices.

Perfect Competition

Perfect Competition exists when:1. Many buyers and sellers act

independently.2. Sellers offer identical products (No

variety)3. Buyers are well informed about products.4. Sellers can enter or exit the market

easily (No barriers to entry).5. No control over pricing

Perfect Competition

1. Many Buyers and Sellers—No one buyer or seller has enough power to control the market.

Buyers/Sellers act independently

Promotes competition

Perfect Competition

2. Identical Products—Buyers make purchasing decisions by comparing “apples to apples.”

Buyers choose a product based on price, not on unique characteristics.Note: If one seller controlled all production of a good then it would be a monopoly.

Perfect Competition

3. Informed Buyers—Buyers must be knowledgeable about products.

Without accurate and readily available info buyers cannot compare products effectively.

4. Easy Market Entry and Exit—The freedom to switch from market to market helps insure no one can dominate market.

Perfect Competition

5. No Control over pricing

Because firms make identical products, they are solely competing on the basis of price. They are forced to maximum efficiency in order to offer the lowest price.

Monopolistic Competition

Monopolistic Competition—Differs from perfect competition in one key aspect—sellers offer different rather than identical products.

Each firm seeks this in order to sell unique product.This is more common than perfect competition.

Monopolistic Competition

Similarities between Perfect and Monopolistic competition:

Both compete under same laws of supply and demand.Both systems feature many buyers/sellers acting independently .

Monopolistic Competition

Product Differentiation—Sellers point out differences between their products and those of their competition (some variety)

Non-Price Competition—Sellers compete on a basis other than price. Why?

1. Physical characteristics2. Location3. Service level4. Advertising

Monopolistic Competition

Profits—The main goal of sellers; By setting its product apart from the competition and convincing buyers to base their decisions on non-price factors. Therefore: A seller a little control over pricingSellers look for “Brand Loyalty”

Monopolistic Competition

Low Barriers to entry No patents (due to patent

expiration), extreme product differentiation, and too many competitors