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Chapter 13 Imperfect Competition

Chapter 13 Imperfect Competition - CHAPTER 13 Imperfect...

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CHAPTER 13 Imperfect Competition and Firm Strategy Differences in tastes, desires, incomes and locations of buyers, and differences in the use which they wish to make of commodities all indicate the need for variety and the necessity of substituting for the concept of a “competitive ideal,” an ideal involving both monopoly and competition. Edward Chamberlin e have so far considered two distinctly different market structures: perfect competition, characterized by producers that cannot influence price at all because of extreme competition; and pure monopoly, in which there is only one producer of a product with no close substitutes and whose market is protected by prohibitively high barriers to entry. Needless to say, most markets are not well described by either of those theoretical structures. Even in the short run, producers typically compete with several or many other producers of similar, if not identical, products. General Motors Corporation competes with Ford Motor Company, Chrysler Corporation, and a large number of foreign producers. McDonald’s Corporation competes with Burger King Corporation, Hardees, and a lot of other burger franchises, as well as with Pizza Hut, Popeye’s Fried Chicken, and Long John Silver’s. People’s Drug stores compete directly with other drug chains and locally owned drugstores, and indirectly with department and discount stores that sell the same non-drug products. In the long run, all these firms must compete with new companies that surmount the imperfect barriers to entry into their markets. In short, most companies competing in the imperfect markets can cause producers to be more efficient in their use of resources than under pure monopoly, although less efficient than in perfect competition. One word of caution, however: The study of so-called real-world market structures can be frustrating. Although models may incorporate more or less realistic assumptions about the behavior of real-world firms, the theories developed from them are conjectural. At best, they allow economists to speculate on what may happen under certain conditions. Real-world markets are imperfect, complex phenomena that often do not lend themselves to hard- and-fast conclusions. Monopolistic Competition As we have noted in our study of demand, the greater the number and variety of substitutes for a good, the greater the elasticity of demand for that good—that is, the more consumers will respond to a change in price. By definition, a monopolistically competitive market like the fast-food industry produces a number of different products, W
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Chapter 13 Imperfect Competition and Firm Strategy 2 most of which can substitute for each other. If Burger Bippy raises its prices, then, consumers can move to another restaurant that offers similar food and service. Because of consumer ignorance and loyalty to the Big Bippy, however, Burger Bippy is unlikely to lose all its customers by raising its prices. It has some monopoly power. Therefore, it
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