4.1.5.8 The dynamics of competition and competitive market processes Flashcards
What are short-run benefits of competition?
Supernormal profits for reinvestment, initial price reductions, quality improvements as firms differentiate.
What are long-run benefits of competition?
Productive efficiency (lowest AC), allocative efficiency (P=MC), dynamic efficiency from innovation, greater consumer choice.
How do firms compete beyond price?
Through product improvement, cost reduction, service quality, innovation, branding.
What is creative destruction?
Schumpeter’s concept where innovation destroys old industries while creating new ones (e.g., Netflix vs Blockbuster).
How does creative destruction work?
New firms innovate to overcome barriers, more productive firms grow, less productive firms exit, economy’s productive potential expands.
Why is creative destruction important?
Drives long-term economic growth through innovation and market evolution.
What incentivizes new market entry?
Existing firms’ supernormal profits attract innovators to develop better/cheaper alternatives.
How does competition improve products?
Firms continuously innovate and upgrade to maintain/gain market share.
How does competition reduce costs?
Pressure to lower prices drives productive efficiency and process innovations.
What are examples of creative destruction?
Netflix replacing Blockbuster, digital cameras replacing film, streaming replacing DVDs.
How does service quality factor in competition?
In service industries (e.g., banking), superior customer service becomes key competitive advantage.
What happens without competition?
Monopoly power may lead to higher prices, lower quality, reduced consumer surplus, less innovation.
How does competition affect dynamic efficiency?
Short-run profits fund R&D → long-run technological progress.
What’s the role of non-price competition?
Allows firms to differentiate beyond price (features, branding, service) to build loyalty.
How does creative destruction create markets?
New technologies enable entirely new products/services (e.g., smartphone apps).
How does creative destruction destroy markets?
Renders old technologies obsolete (e.g., video rental stores).
Why is consumer choice important?
Competition forces firms to cater to diverse preferences → wider product variety.
What’s the relationship between competition and efficiency?
Competition drives all three efficiencies: productive (min AC), allocative (P=MC), dynamic (innovation).
How do monopolies affect this process?
High barriers may slow creative destruction unless innovators find ways around them.
What’s the key takeaway about competition?
It’s a dynamic process where firms constantly adapt through price/non-price strategies to survive.
