Competition - LeFonch

Who's Competing?

In an economy, firms are always competing to sell you their own products.
There are many factors that affect which people are inclined to buy which products, such as marketing, pricing, availability and much more.
There are two main types of competition, which are perfect competition (theoretical and impossible in real life) and monopolistic competition (competition we see in real-life).

Perfect competition is a theoretical scenario first formalized by economist Léon Walras.
In a perfect competition, buyers will only buy from the cheapest seller in the market.
Thus firms must push to increase their efficiency, allowing them to reduce the price and gain an edge on other firms,

Buyers must have perfect knowledge of all products and their prices, and all products must be available to them.
This way buyers will purchase only the cheapest option.
Like many of the other criteria for perfect competition, this is impossible to achieve.

There shouldn't be differences in quality or marketing, pricing being the only factor that matters.
This means that buyers won't have any preferences when buying products.

A Large Number of Buyers and Sellers

Having a few sellers means that they can somewhat control pricing, which shouldn't happen in perfect competition.
If one firm were to own a large percentage of the market, their decisions would have a large impact on the rest of the market as well, which shouldn't occur in perfect competition

Sellers have to accept the market price and cannot set prices themselves.
This can be achieved by having a large number of sellers, as they will naturally prevent firms from setting the prices themselves.

In similar vain to the previous points, free entry and exit into the market is required, in order to have a large number of sellers in the market.
High barriers of entry that are in some real-life markets prevent this from happening.

Monopolistic competition, is the type of competition that normally occurs in real-life.
Monopolistic competition gets its name from how every firm in a competition will have a small monopoly on their brand and specific product.

Many features of monopolistic competition are similar to those of perfect competiton.

Many buyers and sellers mean that sellers can't control the price level.
While it is close, it cannot be perfect competition, because the products are differentiated and people will buy different products depending on influencing factors.
For example differences in branding, quality, etc.

Free entry and exit into the market.
This allows many firms to be in a market.
However, firm may have a tiny monopoly because of the differentiation of their product.

This is because people will have some preference, due to factors such as brand familiarity.
Examples: restaurants, clothes, chocolate bars, etc.

Oligopolies occur when a number of firms control the market.
The industry is dominated by a small number of firms.
For example grocery market chains can often form oligopolies, as large brands have established stores all across a country, making it harder for smaller businesses to compete.
Oligopolies occur when there are very high barriers to entry.
Products can be highly differentiated, usually though branding.
Competition in oligopolies usually isn't through pricing, but more through branding.
Oligopolies are usually non-problematic, however, they have a high chance for collusions to form.
A collusion is when multiple firms come together to try and control the market.
This can lead to a cartel.
A cartel is when a group of companies work together to set a certain price level, usually higher than what would be beforehand in order to make more profit.
In this case government intervention is required to diffuse the cartel.

Examples of Oligopolistic Structures

A duopoly is when only two large firms control a market.
It functions similar to a oligopoly, but generally has a higher risk for collusions.