Today’s LEQ: Why might competition ensure efficiency?

 Do not fit strict assumptions of perfect competition; usually differ in one or more factors  For example:  Products may not be completely identical  Entrance into the market may be costly/difficult

 Firms in imperfectly competitive markets are often interdependent, with the actions of one firm greatly affecting business for its competitors

 Large firms competing with other large firms often try to avoid direct price competition  Uncertain how competitors would react  Joint interest in keeping prices above the level that would result in perfect competition

 In markets dominated by a few large firms, there are some strong pressures supporting price collusion  Tacit vs. Explicit in countries like the U.S.  i.e. cell phone companies, cable/Internet providers  Tacit = understood or implied without being stated  Activity 3: Dueling Gas Stations

 Both large and small firms in imperfectly competitive markets emphasize nonprice competition  Think of all the advertising that stresses real or imagined differences in the quality of g/s provided to customers!  Non-Price Competition Taste Testing Activity – Real vs. Imagined Differences

1. List strategies each company probably uses for non-price competition. 2. What differences is each company trying to emphasize?

1. Based on the class results of our blind taste test, did the advertisements promote real or imagined differences? 2. Under which market structure would these companies be categorized?

 Perfect Competition…  Usually lower prices  Efficient use of scarce resources  Less variety  s  Imperfect competition  Less competition leads to less output and higher prices  BUT, often offset by large firms able to take care of economies of scale ▪ i.e. “mom & pop shop” vs. Walmart  More variety

 Evaluating imperfectly competitive markets involves weighing the costs & benefits  Gov’t should work towards eliminating extreme concentrations of market power & collusive behavior to maintain efficient competition  BUT, policies should stop far short of breaking up large firms just because the market isn’t perfectly competitive.

 Recall the equilibrium price established in prior rounds – about $5.00  Let’s try this game again but with only 4 sellers

 What happened to the supply curve for wheat?  What happened to the equilibrium price for wheat?

 We’re All in This Together… Aren’t We?!

 The Airlines Case: Is Big Better?

 3 market structures that demonstrate imperfect competition  2 characteristics of imperfect competition  1 question you have on what we’ve covered so far… Anything on which you’re confused??