Kinds of Competitions

• Different kinds of competitions and effect

on the Economy
• Which is Good/ Positive
• Which is bad/Negative

• Dr. Ejaz Ahmed

• 20th Jan 2025
 Brainstorm!
As a class, do the following:
List a company/companies that
have no real competition:
List a company/companies that
have a few (one or two)
competitors:
List a company/companies that
have many competitors:
 Which situation is best for
consumers (buyers)? Why?

Which situation describes most

markets?
All of the above are called Market
Structures or Models of
Competition. Each one exists to
some degree in our economy. They
are important because the model of
competition determines in a large
degree the availability of products,
choice of product and most
importantly price of products.
Models of Competition

How businesses compete and

what impact it has on me.
 What are Models of Competition?
• Def. a description of the type of market
that a particular business or industry
operates in.
• Also known as Market Structure.
 4 Types of Models of Competition
1. Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly
 Perfect Competition
• Def. a market structure in which a large
number of firms (businesses) produce the
same product.
• Only reason to choose one firm over
another is the PRICE
 Four Conditions for Perfect
Competition
1. Many buyers and sellers
People have lots of options to choose whom
they buy from.

2. Identical Products
There are no differences between what is sold
by different suppliers. They are exactly the
same!
 Four Conditions for Perfect
Competition (cont.)
3. Informed Buyers and Sellers
Buyers know the prices and quality of product
sold by all venders to make the best
decision
4. Free Market Entry and Exit
Businesses can enter the market when they
can make money and exit when they can’t.
 What types of businesses are
Perfectly Competitive?
• Farm Markets (ex. Public Market)
– Many farmers selling their vegetables (Many
buyers and sellers)
– A carrot from farmer Brown is equal to a
carrot from farmer Jones (Identical Products)
– Buyers can compare prices and quality by
walking the market (Informed Buyers/Sellers)
– Farmers choose to bring produce or not.
Inexpensive to rent a space in the market
(Free Market Entry/Exit)
 Are there many perfectly
competitive businesses?
• NO! All 4 of the conditions must be met for
perfect competition. This is very difficult in
most industries.
– Often people can only buy from one supplier
– Products are rarely identical
– Buyers often do not know if a product is
cheaper/better at a different supplier
– Barriers to entry prevent free market entry
 Barriers to Entry
Def. Factors that make it difficult for new firms to
enter a market.
• Start-up Costs • Technology
The expenses that a Some markets require a
new business must high degree of
pay before the first technological know-
product reaches the how. As a result, new
customer. entrepreneurs cannot
Ex. Rent, machines, easily enter these
product, labor, etc. markets.
Ex. Software and
Pharmaceutical
companies
 Monopoly
• Def. a market dominated by a single seller.
• They form when barriers prevent
competitors from entering the market. This
is often because of the high costs to
supply a product.
• They take advantage of their monopoly
power and charge high prices.
• In the United States most monopolies are
illegal.
 Examples of Monopolies
• During the late 1800s and early 1900s
Standard Oil and Carnegie Steel
• From the late 1800s to the 1980s AT&T
(also known as Bell Telephone) had a
monopoly on phone service
• Microsoft has been accused and convicted
in court for having monopolistic
characteristics
 Natural Monopolies
• Some monopolies are allowed by the
government to exist. Natural Monopolies
are markets that run best when one firm
provides all of the supply.
• Ex. Monroe County Water Authority
• RG&E used to be a natural monopoly, but
recently has opened to competition by
sharing power lines.
 Government Monopolies
• Patents: Licenses that give inventors the
exclusive right to sell their product for a
certain period of time.
• Industrial Monopolies: Rare cases where
the government allows an industry to
restrict the number of firms in the market.
Ex. Major League Baseball.
 Monopolistic Competition
• Def. Many companies compete in an open
market to sell products that are similar,
but not identical.
 Four conditions of Monopolistic
Competition
1. Many Firms
Mono. Comp. do not have high start-up costs
and so have more firms.

2. Few Artificial Barriers to Entry

Barriers to entry are relatively low.
 Four conditions of Monopolistic
Competition
3. Slight Control over Price
Firms have some freedom to raise prices
because each firm’s goods are a little
different from everyone else’s
4. Differentiated Products
Firms have some control over selling price
because they can differentiate, or
distinguish, their products from other
products in the market.
 What types of businesses are
Monopolistically Competitive?
• Lots! Most markets exist in this model.
• Ex. Soft Drinks
– Coke, Pepsi, RC, WPop, etc. (many firms)
– Relatively inexpensive to produce, don’t need
huge factories, chemicals, etc. (Few artificial
barriers to entry)
– Coke is a little more expensive than WPop
(Slight control over price)
– Some people like Coke more than Pepsi, etc.
(Differentiated Products)
 So, how do Firms in Monopolistic
Competition get customers?
• Through Nonprice Competition: a way to
attract customers through style, service or
location, but not a lower price.
4 types of Nonprice Competition
1. Characteristics of Goods
Firms distinguish products through size, color,
shape, texture or taste
Ex. Coke vs. Pepsi, Lemon Pepsi, Vanilla Coke
2. Location of Sale
A convenience store in the middle of the desert
differentiates by selling it miles from
competitors
 4 types of Nonprice Competition
(cont.)
3. Service Level
Some sellers can charge higher prices because
they offer customers a higher level of
service
Ex. Fancy sit-down restaurant vs. McDonalds
4. Advertising Image
Advertising creates apparent differences
between products in the marketplace.
Ex. Jordans vs. Carmelo Anthony’s shoes
 Monopolistic vs. Perfect
Competition
Perfect Monopolistic
Competition Competition
Prices Lower, firms have Higher, firms have
no control some control
Profits Lower Higher in short term,
but must work hard to
keep ahead of rivals
Cost Low costs, no Higher costs for
and variety (identical differentiation, wide
Variety products) variety
 Oligopoly
• Def. A market dominated by a few, large
profitable firms
 How do Oligopolies work?
• Collusion: • Cartels:An association by
An agreement among producers established to
members of an oligopoly coordinate prices and
to set prices and production.
production levels.
Ex. OPEC: Organization of
• Price Fixing: Petroleum Exporting
An agreement among Countries controls the oil
firms to sell at the same supply and manipulates
or similar prices. prices of gasoline.
• Both are Illegal in the Ex. DeBeers controls 80% of
world’s diamonds, keeps
U.S.
prices high by limiting
supply.
 Market Power
Def. The ability of a company to control
prices and output

Markets dominated by one or a few firms

(monopoly or oligopoly) have higher prices
and lower output. (great market power)
Markets with many sellers (monopolistic and
perfect competition) have lower prices and
higher output. (little or no market power)
 Predatory Pricing
• Def. Setting the market price below cost
levels for short term to drive out
competitors. Firms in Monopolistic and
perfect competition do this to gain market
power.
• Ex. My pizza shop sells slices for $0.50
each, even though it costs me $0.75 to
make. I am losing money ($-0.25), but it
drives the competition out of business, so I
can raise the price later.
 Government and Competition
• The Government keeps firms from
controlling prices and supply of important
goods. Antitrust laws are laws that
encourage competition and break up
monopolies/oligopolies in the marketplace
 4 forms of Anti-trust Laws
1. Regulating Business Practices
Government can intervene if a firm has too
much market power
2. Breaking Up Monopolies
Antitrust laws have been used to break up
monopolies (ex. Standard Oil, AT&T)
 Antitrust Laws (cont)
3. Blocking Mergers
A merger is a combination of two or more
companies into one firm. The government
can block this if it decreases competition
4. Preserving Incentives
In 1997, new guidelines on mergers were
introduced allowing companies to merge if
they show benefits to consumers.
 Deregulation
• Def. The removal of some government controls
over a market. It is used to promote competition.
• Deregulation allows more competition in a
market, lowers prices and increases variety
(benefits), but often can lead to layoffs and
business closings (negatives) in the short term
because of the change.
• Ex. Airline Deregulation in the early 1980s. New,
smaller, cheaper airlines emerged, but the older,
larger airlines are having trouble competing and
have had to cut back on flights, employees, and
benefits (in-flight meals etc.)