The nature and degree of competition among
firms operating in the same industry
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Large number of buyers and sellers
Buyers and sellers deal in identical products
with no difference in quality
Buyer and sellers act independently
Buyers and sellers are reasonably wellinformed about products and prices
Buyers and sellers are free to enter into,
conduct, or get out of business
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Supply and demand set the equilibrium price
After a price is set industry decides on output
The maximum profit occurs when the
Marginal cost of a product equals the
marginal revenue.
Look at page 165
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Few perfect markets exist
◦ Vegetable farming….roadside markets
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Imperfect markets lacks one or more of the
conditions.
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This structure has all conditions of perfect
competition except for identical products.
Therefore it monopolizes a small portion of
the market.
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Real or imagined differences between
competing products in the same industry
◦ Different brands
◦ Are they really real or do they just appear real?
◦ Nike, Adidas, New Balance?
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Use of advertising, giveaways, or other
promotional campaigns to convince buyers
that the product is somehow better than
another brand.
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Narrow price range◦ Sellers raise or lower the price within this narrow
range to keep buyers from switching brands.
◦ Think about shoes…what is the most you will pay?
◦ What if they are too cheap? Does that affect you?
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A market structure in which a few very large
sellers dominate the industry.
◦ Auto-industry
◦ The number of firms is not as important as the
ability to change output
◦ Further from perfect competition than monopoly
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When one firm acts another follows
◦ Employee pricing
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Collusion-a formal agreement to set prices in
a cooperative manner
Price Fixing-agreeing to change the same or
similar prices. This is almost always higher
than the market price.
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One company changes expecting the others
to follow.
◦ What if they do not?
◦ Why do they?
◦ Think about gas prices.
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Marginal cost equals marginal revenue.
Much higher than perfect competition and
higher than monopolistic competition.
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Opposite end of the spectrum from perfect
competition.
Only one seller of a particular product
Extreme case.
In some rural areas internet and phone
companies
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Natural monopoly- costs of production are
minimized by having a single firm produce
the product
Phone lines and gas lines
Cost of production falls as the firm gets
larger
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Absence of other sellers in that area
◦ Byron Nebraska has one grocery story and one gas
station…closest is 18 miles
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A patent may be granted for 20 years and
copyrights last for lifetime plus 50 years.
◦ Disney was great at this.
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Only the government can provide the service
or good.
◦ Weapons and resources
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They have the greatest ability to set price.
They also have the largest profit opportunity.
The price market allows them to charge more
and produce less.