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The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly. The main criteria by which one can distinguish between different market structures are: the number and size of firms and consumers in the market, the type of goods and services being traded ...
As it is well known, requirements for a firm's cost-curve under perfect competition is for the slope to move upwards after a certain amount is produced. This amount is small enough to leave a sufficiently large number of firms in the field (for any given total outputs in the industry) for the conditions of perfect competition to be preserved.
The Herfindahl is correlated with the number of firms in an industry because its lower bound when there are N firms is 1/N. In the more general case of unequal market share, 1/H is called "equivalent (or effective) number of firms in the industry", N eqi or N eff.
Firms do not cooperate, i.e., there is no collusion; Firms have market power, i.e., each firm's output decision affects the good's price; The number of firms is fixed; Firms compete in quantities rather than prices; and; The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors' decisions.
A simple measure of market concentration is to calculate 1/N where N is the number of firms in the market. A result of 1 would indicate a pure monopoly, and will decrease with the number of active firms in the market, and nonincreasing in the degree of symmetry between them.
Competition requires the existing of multiple firms, so it duplicates fixed costs. In a small number of goods and services, the resulting cost structure means that producing enough firms to effect competition may itself be inefficient. These situations are known as natural monopolies and are usually publicly provided or tightly regulated. [31]
Perfect competition exists where an industry's concentration ratio is CR n = n/N, where N is the number of firms in the industry. That is, all firms have an equal market share. Low concentration – 40% A concentration ratio of close to 0% implies perfect competition at the least. This is only possible in an industry where there is a very large ...
It will prefer to share the market 50/50 with the other firm and earn strictly positive profits. [6] Product differentiation. If products of different firms are differentiated, then consumers may not switch completely to the product with lower price. Dynamic competition. Repeated interaction or repeated price competition can lead to the price ...