Imperfect Competition

And finance Allah shmoop What is perfect competition people It's

true in the real world and nothing's perfect and markets

are no exception Perfect competition is a hypothetical market structure

one where no firms are undercutting each other and consumers

never get ripped off While perfect competition doesn't exist in

the real world it's a useful bar to compare other

market structures to something like Oleg Op Elise monopolies monopolistic

competition and other things of similar ilk There are five

key ingredients in the perfect competition Punch bowl one There's

no differentiation in goods and services I all firms they're

selling the same stuff within one market For instance in

order for the lemonade market on Maple Street to be

in perfect competition Jill Joe and Sammy would all be

selling the exact same kind of lemonade Same amount of

lemons sugar and water in each same colored cup In

reality though Jill's differentiated her product by making it raspberry

lemonade Joe has added extra sugar for the sweet tooth

crowd and Sami is playing the organic card when there's

differentiation in products that makes competition imperfectly Since firms air

signalling to customers why their specific product is preferable to

the other a similar ones This commonly seen type of

imperfect market structure a market selling differentiated products is called

monopolistic competition Okay too in perfect competition all firms are

priced takers That is when firms are priced takers they

are at the mercy of the price set by the

market in the Maple Street lemonade market While that would

mean Jill Joe and Sami's identical lemonades would all sell

for the same amount it's called one dollars Exactly If

Joe tried to raise the price of his lemonade to

a dollar and a quarter consumers would leave him entirely

and just go by Jill or Se Mi's lemonade instead

which would put Joe while pretty much out of it

Remember they're all selling the exact same stuff in a

perfectly competitive market In reality Joe is charging a dollar

and a quarter And while he's still in business Jos

clientele are willing to pay that extra quarter for that

extra sugar high And Sami's organic crowd followers are loyal

right his lemonades even more expensive than Jos at two

dollars But it sells just fine because Sami's consumers only

wanna buy organic will Jail still gets her fair share

of customers too because well there's a niche market for

raspberry lemonade These kiddos are all making their own prices

with their differentiated lemonade rather than being at the mercy

of the markets deemed price right total pure price takers

Next up Three buyers know all of the details on

products and prices in perfectly competitive markets That's how buyers

enforce perfect competition They'LL put anyone out of business by

not buying from them if they confined the same product

for a better deal elsewhere Think about how Joe would

run himself out of business if he was selling the

same lemonade as the others at a higher price Right

Remember that Well in the real world buyers don't have

perfect information We have what marketers tell us on they

may or may not be over selling their wares G

What marketer doesn't lie to you And we have things

like online reviews you know many of which are fake

And then we have recommendations from friends and we have

yelp We can comparison shop products and their prices In

reality Thank you Internet With all the technology we have

nowadays well it's given us access toe wave or information

than ever before And it's also given us access to

more products and services than ever before right Okay so

moving on number four In a market with perfect competition

there are no barriers to enter and no barriers to

exit the market In the lemonade market Any kid could

open up a lemonade stand with essentially no startup costs

And if the market was too competitive while any kid

would close their lemonade stand without worrying about trying to

stick it out you know since they already had bought

all their lemonade making paraphernalia When markets are easy to

enter and exit keeps firms as price takers they're at

the mercy of the market If the lemonade kids air

you know business owners created in Olongapo Lee deciding to

collude on price wealth new lemonade stands would pop up

and an undercut their plan Like for example if Jill

Joe and Sammy all agreed to sell their identical lemonade

at Buck fifty instead of buck wealth and new kids

on the block Jake Jordan and Sarah might all open

their own lemonade stands being competitors charging one dollars per

drink instead of that buck Fifty Guess what Well then

Jill Joe and Sammy would then either have to lower

their prices back to a dollar or they go out

of business Right Number five There are only small firms

and perfectly competitive markets Definitely no oligopolies monopolies or uh

well Amazon which would mean Jill Joe and Sammy all

have a small share of the regular old lemonade market

There's no dominant player in the real world Firms are

incentivized to grow since it usually means they can benefit

from increasing returns to scale making more with less So

for example in the real world Jill's Raspberry Lemonade is

able to sell at a lower price because she owns

about half of the lemonade market on Maple Street But

in actuality Jill ran Jeannie's raspberry lemonade stand out of

business because while Jill was selling her raspberry lemonade at

a lower price than Jamie could afford Teo make hers

You know like how Wal Mart Target Costco and other

big corporations ran their smaller mom and pop shop competitors

out of business When there are a few firms or

one big one in a market it's typically when they

become old apples or monopolies which makes them Franks makers

instead of price takers right So to recap perfect competition

is hypothetical market structure where one there's no differentiation in

products to firms are priced takers not makers Buyers have

complete information There are no barriers to enter or exit

the market as a seller And five all firms are

small and modest Commodity markets like grain and oil are

the closest things we have in real life too Perfect

competition There's not too much differentiation happening there and buyer

information is more complete in those markets than in most

We can use the concept of perfect competition to analyze

what's happening in imperfectly competitive markets And you know the

rationale behind all that while perfect competition sounds great for

consumers since it prevents price setting by firms of the

real world isn't all that bad Differentiation is great We

wouldn't have Coke and Pepsi and rotten Apple otherwise and

economies of scale can make prices even lower than before

A world with complete information would be also nice but

sometimes life hands you lemons and well you've got to

know how to squeeze the juice out of them So

good luck with that