PERFECT COMPETITION Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved.

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PERFECT COMPETITION Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

PERFECT COMPETITION l The market strategies that a company follows are determined for the most part by the level of competition the company faces l The level of competition can varies between no competition, which is called monopoly, to the most intense competition which is called perfect competition

PERFECT COMPETITION l The conditions for perfect competition are discussed on pages 186 and 187 l While it is clear that no market entirely meets the conditions for perfect competition, it is clear that many markets come close.

PERFECT COMPETITION l The most important result of perfect competition, and the one most difficult for students to accept, is the idea that under competitive conditions, the company loses control over the price of the product. l The price of the product is determined by the broader market and the company has no choice but to charge that price

PERFECT COMPETITION l For example, consider gas stations on opposing corners. The sell an identical product although Exxon and Mobile spend billions trying to convince you otherwise. l Suppose the price were not the same at the two stations. Clearly the higher priced station would lose business and would be forced to lower the price to match the competitor

PERFECT COMPETITION l Of course the station owners could collude to share the market at a higher price, which is what would probably happen, but even so, the price would be limited by the price at nearby stations. l So each station has to charge a price that is within a few cents of the prevailing market price in the area.

PERFECT COMPETITION l Conditions for competition are more often met in wholesale rather than retail markets. l Many wholesale products are defined by engineering standards and the buyer more focused on price

PERFECT COMPETITION l For example, if you are a manufacturer in need of some nuts and bolts. These would be defined by engineering standards and a request for bids would be let. l With a lot of suppliers of the parts, this would be a very competitive market.