EXERCISE 4. Prepare short reports on the following topics. The reports are to be translated in the class

· The assembly line of Henry Ford.

· Marketing and advertising in Russia.

8. HOW FIRMS COMPETE

Perfect Competition: Many Buyers And Sellers

The laws of supply and demand operate as we have described them only under conditions ofperfect competition. A perfectly competitive market, according to economists, requires all of the following conditions:

· Many buyers and sellers; no individual or group can influence the behavior of the market.

· Identical goods or services offered for sale.

· No buyer or seller knows more than any other about the market.

· Buyers and sellers are able to enter or leave the market at will.

Few markets have all these characteristics. The New York Stock Exchange, the American Stock Exchange and other similar securities markets, however, are good examples of perfect competition.

· There are so many buyers and sellers of stocks and bonds, that (with few exceptions) no individual or group can control the market for any single security.

· The individual securities of a particular firm are totally interchangeable.

· All securities transactions are recorded and the informa­tion is made available to the general public.

· Traders can buy or sell individual securities at will.

Can you think of other examples of competitive markets?

Monopolistic Competition:

Many Unique Products

Perfect competition and perfectly competitive markets exist in only a few businesses or industries. In fact, most businesses work very hard to make consumers believe that their products and services are special or unique. When many firms are selling similar products and services while explaining how they are "new and improved" or "used by professionals," or "the best value for the lowest price," the market is no longer perfectly competitive. Economists describe a market with many sellers providing similar but not identical products asmonopolistic competition.

Mary Lou and Hot Dog Harry operate competing side­walk stands fairly close to one another on the same street in town. At lunchtime both Mary and Harry do a brisk business, and they both have their steady customers. Ask Mary's regulars why they prefer her hot dogs and they might tell you that they think the sauerkraut she serves with them is something special or that they like the courteous way in which she treats her customers. Harry's customers are equally enthusiastic about his frankfurters and about Harry. Harry charges $.90 for his hot dogs. Mary Lou charges $.95. There is another stand a few blocks away where the frankfurters sell for $.85, but that one does not do as well as Mary Lou or Hot Dog Harry.

Although Mary Lou and Hot Dog Harry sell similar products, they are not the same in the minds of those who prefer one over the other. The effort to make a product more attractive than the competition's distinguishes monopolistic competition from perfect competition.

Although stock market trading is as close to perfect competi­tion as anything you can find, stockbrokers provide an example of monopolistic competition in a service industry. Stockbrokers will not claim that the shares of General Motors stock they buy or sell for you are any different from the shares that anyone else buys or sells. But stockbrokers do compete with one another for the public's business. They try to make their services more attractive than the competition's so potential customers will think of them the next time they think of investing.

The process of creating uniqueness in products is known asproduct differentiation.Product differentiation, when it is successful, enables a firm to create product loyalty so its customers prefer its products over the competition's.

Oligopoly: A Few Sellers

Oligopoly is a term applied to markets dominated by a few (roughly three to five) large firms. Breakfast cereals, automo­bile and computer hardware are examples of industries domi­nated by oligopolies. As the market structure of an industry changes from many firms selling differentiated products to a few firms dominating an industry, economists say that the "concentration ratio" is changing. The concentration ratio is determined by the percentage of an industry's output accounted for by its four largest firms.

Oligopolies exist because it is difficult for competing firms to enter the market. Circumstances that make it difficult to enter the market are described as "barriers to entry." One such barrier is the high cost of entry. The capital needed to enter the automobile manufacturing business, for example, would run to billions of dollars.

Another barrier to trade is created by patent protections. The products of certain industries, such as aluminum, chemicals and electronics, are protected bypatents. Competing firms cannot enter those industries unless they pay the patent holders for permission to use the process or find a new method of production not covered by existing patents.

Price competition is less effective where there is oligopoly. Firms know that if they reduce their prices the competition will do the same. Therefore, instead of increased sales (as would be the case in a competitive market), price reductions would simply reduce revenue. In place of competition, oligopolies often look to price leadership, collusion, and custom to deter­mine their pricing policies.

· Price leadership is the practice of one firm in the industry, usually the largest, setting a price which other firms follow.

· Collusion is a secret arrangement between two or more firms to fix prices or share the market. These agreements are usually illegal.

· Custom is the practice of establishing prices and market shares based on long- standing tradition. Sometimes the courts have found such practices to be unlawful; in other instances they were found to be legal.

Monopoly: One Seller

A market in which there is only one seller is a monopoly. You will recall that under conditions of perfect competition market price could be found at the intersection of the supply and demand curves. In those circumstances both supply and demand reflect the thinking of many buyers and sellers; no individual or group could affect the market price. In a monopoly, however, supply is determined by a single firm. This gives that firm the power to select any price it chooses along the demand curve. Which price will it choose? The one that yields the greatest profit.

Monopolies have the following characteristics:

· A single seller or monopolist.

· No close substitutes. The product sold by a monopoly is different from those offered by other firms. Buyers must either pay the monopolist's price or do without.

· Barriers to entry. Competing firms are unable to enter a market where a monopoly exists.

The History of Economic Thought