Chapter 11: Imperfect competition and strategic behaviour
11.1 The structure of the Canadian economy
We cant abide to needy and industries into two broad groups those within large number of relatively small firms
and those with a small number of relatively large firms.
Industries with many small firms
About 2/3 of Canadas total annual of output is reduced by industry is made up of firms that are small relative to
the size of the market in which they sell.
These are the ones in which individual firms produce more and less identical products and so are priced takers.
Many basic raw materials such as iron, tin, copper, oil, and paper, are sold on world markets where most
individuals firms lack significant market power.
Other industries, but are not well described by the perfectly competitive model even though they contain many
small firms, such as local grocery stores, clothing stores, nightclubs and restaurants spend a good deal of money
and that icing on television and in newspapers and something they would not have to do if they were priced
The theory of monopolistic competition, each originally developed to help explain economic behavior and
outcomes in industries, in which there are many small firms each awaits a market power.
Industries with a few large firms
About 1/3 Canadas total annual output is produced by industries that are dominated by either single firm or
one a few large ones.
To gain the most modern industries that are dominated by large firms contained several firms.
Their names are part of the average Canadian vocabulary: Canadian National and Canadian specific railways;
bank of Montreal, royal bank, and Scotiabank, imperial oil, petrol Canada, and Irving, bell, telus, and Rogers,
loblaws, Safeway, and Sobeys.
Many Service Industries that use to be dominated by small independent producers have in recent decades seen
the development of large firms operating on a worldwide basis.
The theory of oligopoly helps us understand industries in which there are small numbers large firms each with
market power that compete actively with each other.
An industry with a small number of relatively large firms is set to be highly concentrated.
A formal measure of such industrial concentration is given by the concentration ratio
When we measure whether an industry has power concentrated in the hands of only a few firms or dispersed
over many, it is not sufficient to count the firms.
Concentration ratio: the fraction of total market sales (or some other measure of market activity) controlled
over a specified number of industrys largest firms.
Defining the market :
The main problem associated with using concentration ratios is to define the market within reasonable accuracy.
On the one hand, the market may be much smaller than the whole country, or the markets may be larger than
one country as is the case for most internationally traded commodity. This is particularly important for Canada
The globalization of competition brought about the falling costs of trust a share and communication has been
one of the most significant developments in the world economy in recent decades.
As a world has become smaller through the advance in transportation and communication technologies, the
major domestic market has changed dramatically.
Companies may be large relative to the Canadian market, but the relevant market in each case is the global one
in which these firms have no significant market power.
In the case of markets for internationally traded products, concentration ratios can be still use to provide
valuable information about the degree in which production and a given market is concentrated in the hands of a
few forms11.2 what is imperfect competition?
Imperfectly competitive means not dealing with monopoly and not dealing with perfect competition either.
Firms choose their product
Differentiated product: a group of commodities that are similar enough to be called the same product but
dissimilar enough that all of them do not have to be sold at the same price.
Most firms in imperfectly competitive markets sell differentiated products. In such industries, the firm itself
must choose characteristic to give the product that it will sell.
Firms choose their price
Whenever different firms products are not identical each firm much decide on a price to set.
Any one manufacturer will typically have several product lines that differ from each other and from the
competing product lines of other firms. Each product has a price that must be set by its producer.
Price setters: a firm that faces and Downward-Sloping demand curve for its product. It chooses which price to
In market structures of that in perfect competition, firms set their prices and then let demand determine
sales. Changes in market conditions are signalled to the firm by changes in the firms sales.
And perfect competition prices changes continually in response to changes in demand and supply. In markets
where differentiate products are sold prices change less frequently.
Modern firms that sell differentiated products typically have hundreds of distinct products on their price, so
changing the price is very costly, therefore, imperfectly competitive firms often respond to fluctuation in
demand by changing output and holding prices constant.
Only after changes in demand are expected to persist will firms incur the expense of adjusting their entire list of
Non price competition
Many firms in imperfectly competition spends large sums of their money on advertising,. They do so in an