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perfect and imperfect competition - Coggle Diagram

- - - - No collusion :The presence of a relatively large number of firms ensures that collusion (coordination) by a group of firms torestrict output and set prices is unlikely.
      - Independent action: There is no interdependence among firms; each can determine its own pricing policy without considering rival firms' possible reactions. A single firm may realize a modest increase in sales by cutting its price, but that action's effect on competitors' sales will be nearly imperceptible and will probably trigger no response.
      - Small market shares :Each firm has a comparatively small percentage of the total market and consequently has limited control over market price
    - - A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).
        
        product attributes
        
        Product differentiation may entail physical or qualitative differences in the products. Real differences in functional features, materials, design, and workmanship are vital aspects of product differentiation
        
        service
        
        Service and the conditions surrounding the sale of a product are forms of product differentiation
        
        location
        
        Products may also be differentiated through the location and accessibility of the stores that sell them. Small convenience stores manage to compete with large supermarkets, even though these mini-marts sell fewer products and charge higher prices. They compete mainly on the basis of location-being close to customers and situated on busy streets.
        
        brand name and packaging
        
        Product differentiation may also be created through the use of brand names and trademarks, packaging, and celebrity endorsements.
        
        some control over price
        
        Monopolistic competitors have some control over their product prices because of product differentiation. If consumers prefer the products of specific sellers, then within limits they will pay more to satisfy their preferences. Sellers and buyers are not linked randomly, as in a purely competitive market. Nonetheless, the monopolistic competitor's control over price is quite limited because there are numerous potential substitutes for its product.
    - - Entry into monopolistically competitive industries is relatively easy. Because monopolistic competitors are typically small firms, both absolutely and relatively, economies of scale are few and capital requirements are low. However, financial barriers may result from the need to develop and advertise a product that differs from rivals' products. Some firms have trade secrets relating to their products or hold trademarks on their brand names, making it difficult and costly for other firms to imitate them.
    - - non price competition
        
        Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers.
      - greater pricing power
        
        the ability of a firm to raise price without reducing quantity demanded
  - - - the percentage of total industry sales accounted forby the top 4 firms in an industry
        
        four firm concentration =output of four largest firms/total output in the industry
    - - A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry.
        
        Herfindahl index = (%S1)²+ (%S2)² + (%S3)² + ... + (Sn)²
  - - - In monopolistic competition, firms face a downward-sloping demand curve for their differentiated products. Each firm's demand curve is relatively elastic, as consumers can switch to close substitutes if a firm raises its price. The market demand curve is a composite of all firms' demand curves.
    - - In the short run, firms in monopolistic competition maximize profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR), just like in pure competition. However, they have the flexibility to set their own prices within the range determined by demand elasticity
    - - In the long run, firms in monopolistic competition can earn normal profit but not economic profit. If firms are making an economic profit, new firms will enter, introducing more competition and reducing demand for existing firms' products. This process continues until firms only earn normal profit.
        
        complications
        
        A representative firm in the monopolistic competition model earns only a normal profit in the long run. That outcome may not always occur, however, in the real world.
        • Some firms may achieve sufficient product differentiation such that other firms cannot duplicate them, even over time. Such firms may have sufficient monopoly power to realize modest economic profits even in the long run
        •Entry to some industries populated by small firms is not as free in reality as it is in theory. Because of product differentiation, financial barriers to entry are likely to be greater than they would be with a standardized product. The result is some monopoly power, with small economic profits even in the long run.
  - - - Excess capacity:
        Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.
      - Neither Productive nor Allocative Efficiency:
        In monopolistic competition, neither productive nor allocative efficiency occurs in long-run equilibrium.
  - - - The product variety and product improvement that accompany the drive to maintain economic profit in monopolistic competition are a benefit for society. That benefit may offset the cost of the inefficiency associated with monopolistic competition. In monopolistic competition, the pursuit of economic profit drives firms to offer a wide variety of products and make continuous improvements. While this competition may result in some inefficiencies, it benefits society by expanding consumer choices and improving products. Compared to pure competition, monopolistic competition provides consumers with a broader range of options, catering to diverse tastes. It also encourages firms to enhance their products, which obligates competitors to do the same. This product differentiation creates a trade-off: it may lead to productive inefficiency due to excess capacity but also results in a wider array of consumer choices. So, society benefits from better products and increased variety, even if there is some productive inefficiency.
    - - In monopolistic competition, firms must manage three key factors - price, product characteristics, and advertising - to maximize their profit. Finding the right balance among these factors is complex and doesn't fit neatly into a simple economic model. Essentially, each combination of price, product features, and advertising efforts presents a unique situation for the firm in terms of demand and costs (production and advertising). The goal is to identify the combination that leads to the highest profit. In practice, discovering this optimal combination often requires experimentation and trial-and-error because it cannot be easily predicted in advance.
- - - - Oligopolies are characterized by a small number of large firms dominating the market. These firms have significant market power and can influence market outcomes.
    - - differentiated oligopoly: an oligopoly in which firms produce differentiated products
      - homogenous oligopoly: an oligopoly in which firms produce a standardized product
    - - Because oligopolistic industries have only a few firms, each firm is a "pricemaker", like the monopolist, it can set its price and output levels to maximize its profit. But unlike the monopolist, which has no rivals, the oligopolist must consider how its rivals will react to any change in its price, output, product characteristics, or advertising
        
        strategic behavlor
        Self-interested economic actions that take into account the expected reactions of others.
        
        mutual Interdependence
        A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect its rivals to react to the change.
    - - Oligopolies often have high barriers to entry, which make it difficult for new competitors to enter the market and challenge the existing firms. These barriers can include economies of scale, control over key resources, and substantial capital requirements.
    - - Some oligopolies have emerged mainly through the growth of the dominant firms in a given industry.he merging, or combining, of two or more competing firms may substantially increase their market share, which in turn may help the new firm achieve greater economies of scale.
    - - localized markets
        
        Local oligopolies can exist even though national concentration ratios are low.
      - interindustry competition
        
        The competition for sales between the products of one industry and the products of another industry.
      - world trade
        
        import competition
        
        The competition that domestic firms encounter from the products and services of foreign producers.
      - dominant firms
        
        Herfindahl index = (%S1)²+ (%S2)² + (%S3)² + ... + (Sn)²
  - - - The study of how people behave in strategic situations in which individuals must take into account not only their own possible actions but also the possible reactions of others. Originally developed to analyze the best ways to play games like poker and chess.
    - - A famous game analyzed in game theory in which two players who could have reached a mutually beneficial outcome through cooperation will instead end up at a mutually inferior outcome as they pursue their own respective interests (instead of cooperating). Helps to explain why collusion can be difficult for oligopoly firms to achieve or maintain.
  - - - in the kinked-demand theory of oligopoly, price is relatively inflexible because a firm contemplating a price change assumes that its rivals will follow a price cut and ignore a price increase.
    - - Cartels agree on production limits and set a common price to maximize the joint profit of their members as if each were a subsidiary of a single pure monopoly.
        
        Collusion among oligopolists is difficult because of (a) demand and cost differences among sellers, (b) the complexity of output coordination among producers, (c) the potential for cheating, (d) a tendency for agreements to break down during recessions,
        (e) the potential entry of new firms, and (f) antitrust laws.
    - - An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes.
        
        Price leadership involves an informal understanding among oligopolists to match any price change initiated by a designated firm (often the industry's dominant firm).
  - - - advertising is an efficiency-enhancing activity. It is a relatively inexpensive means of providing useful information to consumers and thus lowering their search costs. By enhancing competition, advertising results in greater economic efficiency. By facilitating the introduction of new products, advertising speeds up technological progress. By increasing sales and output, advertising can reduce long-run average total cost by helping firms obtain economies of scale.
    - - Much advertising is designed simply to manipulate or persuade consumers- that is, to alter their preferences in favor of the advertiser's product. In addition, advertising is sometimes based on misleading and extravagant claims that confuse consumers rather than enlighten them. Advertising can also be self cancelling
  - - - Recall that some oligopolists purposely keep prices below the short-run profit-maximizing level in order to bolster entry barriers. Thus consumers and society may get some of the benefits of competition-prices closer to marginal cost and minimum average total cost-even without the competition that free entry would provide.
    - - Over time, oligopolistic industries may foster more rapid product development and greater improvement of production techniques than purely competitive industries would. Oligopolists have large economic profits from which they can fund expensive research and development (R&D). Moreover, barriers to entry may give oligopolists some assurance that they will reap the rewards of successful R&D. Thus, the short-run economic inefficiencies created by oligopolists may be partly or wholly offset by the oligopolists' contributions to better products. lower prices, and lower costs over time.
    - - In recent decades foreign competition has increased rivalry in a number of oligopolistic industries-steel, automobiles, video games, electric shavers, outboard motors, and even social media apps. This has helped to break down such cozy arrangements as price leadership and to stimulate much more competitive pricing.
  - - - one time game
        
        A strategic interaction (game) between two or more parties (players) that all parties know will take place only once.
      - simultaneous game
        
        A strategic interaction (game) between two or more parties (players) in which every player moves (makes a decision) at the same time.
      - positive sum game
        
        A strategic interaction (game) between two or more parties (players) in which the winners' gains exceed the losers' losses so that the gains and losses sum to something positive.
      - zero sum game
        
        A strategic interaction (game) between two or more parties (players) in which the winners' gains exactly offset the losers' losses so that the gains and losses sum to zero.
      - negative sum game
        
        A strategic interaction (game) between two or more parties (players) in which the winners' gains are less than the losers' losses so that the gains and losses sum to a negative number.
      - dominant stratergy
        
        In a strategic interaction (game) between two or more players, a course of action (strategy) that a player will wish to undertake no matter what the other players choose to do.
      - nash equilibrium
        
        The situation that occurs in some simultaneous games wherein every player is playing his or her dominant strategy at the same time and thus no player has any reason to change behavior.
    - - credible threat
        
        believable by the other firm
      - empty threat
        
        is not believable by the other firm
    - - Repeated game :A strategic interaction (game) between two or more parties (players) that all parties know will take place repeatedly.
    - - first-mover advantage
        In game theory, the benefit obtained by the party that moves first in a sequential game. A situation that occurs in a sequential game if the player who gets to move first has an advantage in terms of final outcomes over the players) who move subsequently.
        
        Sequential game :A strategic interaction (game) between two or more parties (players) in which each party moves (makes a decision) in a predetermined order (sequence).
        
        examples
        
        digital examples
        
        brick and mortar