Competitive Markets
Chapter Nine: Competitive Markets
9.1 Market Structure and Firm Behaviour
Market structure: all features of a market that affect the behaviour and performance of firms in that market, such as the number and size of sellers, the extent of knowledge about one another’s actions, the degree of freedom of entry, and the degree of product differentiation.
Competitive Market Structure
Market power: the ability of a firm to influence the price of a product or the terms under which it is sold.
The competitiveness of the market is the degree to which individual firms lack such market power.
A market has a competitive structure when its firms have little or no market power. The more power the firm has, the less competitive the market structure is.
Perfectly competitive market (structure): when each firm has zero market power. * So many firms in the market that each must accept prices set by forces of market demand and market supply * Firms perceive themselves as being able to sell as much as they choose at the prevailing market price and having no power to influence the price. * If firm charges higher price: no sales (there are so many other firms selling at market price that buyers would go elsewhere) * There is no need for individual firms to compete actively with one another because none has any power over the market * One firm’s ability to sell its product does not depend on the behaviour of any other firm
Competitive Behaviour
Competitive behaviour: the degree to which individual firms actively vie with one another for business. * American Express and Visa * Engage in competitive behaviour * Both have real power over the market * Each decides the fees that people pay for the use of their credit cards (within limits set by buyers’ tastes and fees of competing cards) * Either can raise its fees and still attract customers * Actively compete in a market that does not have a perfectly competitive
9.1 Market Structure and Firm Behaviour
Market structure: all features of a market that affect the behaviour and performance of firms in that market, such as the number and size of sellers, the extent of knowledge about one another’s actions, the degree of freedom of entry, and the degree of product differentiation.
Competitive Market Structure
Market power: the ability of a firm to influence the price of a product or the terms under which it is sold.
The competitiveness of the market is the degree to which individual firms lack such market power.
A market has a competitive structure when its firms have little or no market power. The more power the firm has, the less competitive the market structure is.
Perfectly competitive market (structure): when each firm has zero market power. * So many firms in the market that each must accept prices set by forces of market demand and market supply * Firms perceive themselves as being able to sell as much as they choose at the prevailing market price and having no power to influence the price. * If firm charges higher price: no sales (there are so many other firms selling at market price that buyers would go elsewhere) * There is no need for individual firms to compete actively with one another because none has any power over the market * One firm’s ability to sell its product does not depend on the behaviour of any other firm
Competitive Behaviour
Competitive behaviour: the degree to which individual firms actively vie with one another for business. * American Express and Visa * Engage in competitive behaviour * Both have real power over the market * Each decides the fees that people pay for the use of their credit cards (within limits set by buyers’ tastes and fees of competing cards) * Either can raise its fees and still attract customers * Actively compete in a market that does not have a perfectly competitive