9.1 Market Structure and Firm Behaviour Flashcards
What is market structure?
All features of a market that affect the behavior and performance of firms in that market, such as:
- The number and size of sellers
- The extent of knowledge about one another’s actions
- The degree of freedom of entry, and the degree of product differentiation.
What is market power?
The ability of a firm to influence the price of its product.
What does competitiveness in the market mean?
The competitiveness of the market is the degree to which individual firms lack such market power.
A market is said to be competitive when its firms have little or no market power. The more market power the firms have, the less competitive is the market.
What does the extreame form of a competitive market structure look like?
The extreme form of competitive market structure occurs when each firm has zero market power.
In such a case, there are so many firms in the market that each must accept the price set by the forces of demand and supply.
What is the extreme of a competitive market called?
This extreme is called a perfectly competitive market. In such a market there is no need for individual firms to compete actively with one another because none has any power over the market. One firm’s ability to sell its product does not depend on the behaviour of any other firm.
What does the term competitive behavior refer to?
In everyday language, the term competitive behaviour refers to the degree to which individual firms actively vie with one another for business.
Example of a not perfectly competitive market
MasterCard and Visa clearly engage in competitive behaviour. It is also true, however, that both companies have some real power over their market. Each has the power to decide the fees that people will pay for the use of their credit cards, within limits set by buyers’ preferences, the fees of competing cards, and some government regulations. Either firm could raise its fees and still continue to attract some customers. Even though they actively compete with each other, they do so in a market that does not have a perfectly competitive structure.
Example of a perfectly competitive market
the Saskatchewan and Manitoba wheat farmers do not engage in competitive behaviour because the only way they can affect their profits is by changing their own outputs of wheat or their own production costs.
