The Nature of Industry Competitive Markets - Markets characterized by vigorous rivalry among competitors offering essentially the same product. Characteristics Basic Features: Perfect competition- market characterized by a large number of buyers and sellers of a homogeneous product. Price Takers- buyers and sellers that accept market prices as given and devise their buying and selling strategies accordingly. Factors that Shape the Competitive Environment The number and relative size of buyers and sellers is determined by the extent to which products are standardized, and by both entry and exit conditions. a. Product Differentiation Real or perceived differences in the quality of goods and services offered to consumers lead to product differentiation. Sources of product differentiation include actual physical differences, such as those due to superior research and development, plus any perceived differences due to effective advertising and promotion. Price competition tends to be most vigorous for homogenous products with few actual or perceived differences in hotly competitive markets. b. Production Methods When the minimum efficient scale in relation to overall output is large, only a few firms are efficient. Thus, competitive pressures may allow only a few firms to survive. However, when the minimum efficient scale is small in relation to overall production, many businesses can still have sufficient size. The more competitors there are in the market, the more intense the competition. This is especially the case when smaller-thanminimum-scale firms have higher production costs, and when plants are built and higherthan-than-normal scale are involved. When the commitment of minimum-scale resources is required, economies of scale have little or no effect on a new firm's competitive position. c. Entry and Exit Conditions Barrier to entry is any factor or industry characteristic that creates an advantage for incumbents over new arrivals. Legal rights such as patents and local, state, or federal licenses can present formidable barriers to entry in pharmaceuticals, cable television, television and radio broadcasting, and other industries. Barrier to mobility is any factor or industry characteristic that creates an advantage for large leading firms over smaller non leading rivals. Barrier to exit is any restriction on the ability of incumbents to redeploy assets from one industry or line of business to another. Marginal Cost and Firm Supply Market supply curves are the sum of supply for individual firms at various prices. The perfectly competitive firm’s short-run supply curve corresponds to that portion of the marginal cost curve that lies above the average variable cost curve Short-Run Firm Supply Curve *Competitive Firm Short-Run Supply Curve- the marginal cost curve, so long as P > AVC Long-Run Firm Supply Curve *Competitive Firm Long-Run Supply Curve- the marginal cost curve,so long as P>ATC Competitive Market Supply Curve Short-run market supply is the total amount offered by all competitors. In the long run, entry and exit cause supply to be perfectly elastic at the market price *Market Supply with a Fixed Number of Competitors- In the short run, the amount supplied in a competitive market is simply the sum of output produced by all established competitors. The market supply curve is found by adding up quantities supplied by all competitors. *Market Supply with Entry and Exit- markets are dynamic rather than static. In the long run, the process of entry and exit continues until remaining competitors earn zero economic profit. Because average total costs include an allowance for normal profits, zero economic profits will only be earned when the market price equals average total cost. Entry and exit causes the market price to equal the minimum point on each competitive firm's ATC curve. Competitive Market Equilibrium Competitive market prices and quantities are determined by the interplay of market demand and market supply. Competition motivates companies to develop new products and find new ways of producing goods at a less expensive way. *Balance of Supply and Demand- Market demand is the aggregation of quantities that customers seek to buy at each market price. Market supply reflects a summation of the quantities that individual companies are willing to supply at these same prices. The intersection of industry demand and supply curves determines both the equilibrium market price and quantity.
