Markets and the Competitive Environment
Perfect competition: A market in which there are many firms, each selling an identical product
o No restriction on the entry of new firms into the industry (most extreme form of competition)
o Firms and buyers are well informed about the price of the products, and therefore do not change easily.
Monopolistic competition: A market in which many firms compete by making similar but slightly different products.
o Product differentiation: Making a product slightly different from the product of a competing firm
o A firm is the sole producer of the particular version of a good in question.
Oligopoly: A market in which a small number of firms compete.
o Products produced by different firms may be identical or similar.
Monopoly: A market in which there is only one firm and it produces a good or service that has no substitute.
o The firm is protected by a barrier preventing entry of new firms (most extreme absence of competition).
o Usually restricted to a given location.
Measures of concentration:
o Four-firm concentration ratio:
The percentage of the value of sales accounted for by the four largest firms in an industry
Lower the concentration, higher the degree of competition.
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