*Perfect Competition – occurs when a large number of buyers and sellers exchange identical products under 5 conditions.
1) Large number of buyers and sellers, 2) Products are identical, 3) Buyers and sellers act independently, 4) Buyers and sellers are well-informed, 5) Buyers and sellers are free to enter, conduct or get out of business
*Supply and Demand set the equilibrium price under perfect competition
Imperfect competition is when market structures lack 1 or more of the 5 conditions.
*Monopolistic Competition – meets all conditions of perfect competition except for product differentiation (real or imagined differences between competing products in the same industry)
*Use non-price determinants: advertising, giveaways, promotional campaigns to differentiate
*Oligopoly – market structure in which very few large sellers dominate the market (Pepsi, Nike)
1) Act interdependently by lowering price, 2) Engage in price wars that eventually push prices below cost of production, 3) Agree to collusion - price fixing, dividing up market)
*Monopoly – market structure with only one seller of a particular product
1) natural monopoly – single firm produces a product or provides a service because it minimized overall costs (public utilities), 2) Geographic monopoly – occurs when location cannot support 2 or more such businesses (small town drug store), 3) Technological monopoly – occurs when a producer has the exclusive right through patents to produce or sell a product, 4)
Government monopoly – government provides services that a private industry cannot (national defense).