competition depending on product
Oligopoly.2 - .6 May be fierce or light
depending on interfirm
Monopoly .6 and aboveUsually light unless
threatened by entry.
- Perfect competition:
1- many sellers of a homogenous good
2- many well informed consumers
3- single market price determined by interaction of all buyers and sellers
ie if one sells one penny more than the market price then the firm will sell
nothing & if it charges 1 penny less it will sacrifice revenues, it will face
indefinitely elastic demand.
4- firm’s only decision is how much output to produce & sell.
- Market conditions will drive down prices when 2 or more of the
following conditions are met:
1) there are many sellers
2) consumers perceive the product to be homogenous
3) there is excess capacity
- Antitrust laws : designed to prevent collusive pricing
- It is unusual for more than a handful of sellers to raise prices
much above costs for a sustained period: this is true for several
1) when there are many sellers, a diversity of pricing preferences is likely.
Even if the industry PCM is high, a particular seller may prefer a low cost
if it has low costs.
2) A price increase will result in fewer purchases by consumers so sellers
will have to reduce production to support the elevated price. It is difficult
to get a lot of sellers to agree on who should cut production.
3) Even if sellers appear willing to cut production, some may be tempted to
cheat by lowering price and increasing production. Those with small
market shares are most likely to cheat
a small firm may view collusive behavior among bigger rivals as an
opportunity to increase market share. Together with increased market
share may come learning benefits and economies of scale that will
enhance the firm’s long run competitive position.
- Homogenous products: when a firm lowers its price, it expects to
increase its sales. The sales increase may come from 3 different