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ECON 208 - Notes, week of Oct 27

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Economics (Arts)
ECON 208
Lee Ohanian

Adrienne Pacini ECON 208 WEEK October 27 2009 IMPERFECT COMPETITION AND STRATEGIC BEHAVIOUR Chapter 11The Structure of the Canadian Economy Industries with Many Small FirmsThe majority of industries in Canada are made up of firms that are small relative to the size of the market in which they sellIndividual firms are price takers and produce moreorless the same productNo barriers to entry or exitEach store has a unique location that may give it local market power Industries With a Few Large FirmsIndustries dominated by either a single firm or a few large onesOligopoly structureFirms engage in competitive behaviour and produce a range of products that are differentiated form each other and from the products of other large firmsMost modern industries that are dominated by large firms contain several firmsExamples Ford Toyota and General Motors Industrial ConcentrationConcentration ratio the fraction of total market sales controlled by a specified number of the industrys largest firms o Often used as an indicator of market powerDefining the market the main problem associated with using concentration ratios is to define the market with reasonable accuracy o This process is difficultWhat range of products should be includedWhat is the relevant geographical areaImperfect Competition Firms Choose Their Products 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 o Most firms in imperfectly competitive markets sell differentiated productso The firm itself must choose which characteristics to give the products that it will sell Firms Choose Their PricesAdministered price a price set by the conscious decision of the seller rather than by impersonal market forcesPrice setter a firm that faces a downwardsloping demand curve for its product o It chooses which price to setOther than in perfect competition firms set their prices and then let the demand determine the sales NonPrice CompetitionFirms can increase their market share by using nonprice competition o Advertising o Differences in quality of products andor level of customer service o Create entry barriers to protect current pure profits
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