Microeconomics: Competitive Market Behavior


Competitive Behaviour vs. Competitive Market Structure

Here are some key terms to begin discussing and understanding competitive behaviors and market structures. Competitive behaviour is the degree to which individual firms compete against each other to gain higher market shares, earn higher profits, etc. It is also the manner in which firms compete against each other (advertising, pricing policies, customer service, etc.)

Market Structure: Includes all the features which affect the behaviour / performance of the firms in a market.

Features of market structure include:
> Number and size of sellers (concentration ratio);
> Ability of one firm’s actions to influence another firm;
> Degree of product differentiation;
> Degree of freedom of entry (including gov’t regulation).

– The greater the ability of an individual firm to influence the market in which it sells its product, the less competitive the market structure.

Types of market structures

> Perfect competition;
> Monopoly;
> Monopolistic competition; and
> Oligopoly

Perfectly competitive market structure

– each firm has zero market power;

– the actions of any individual firm will have no influence, whatsoever, in the market in which it sells its product.

2 responses to “Microeconomics: Competitive Market Behavior”

  1. I am not an economist, so I apologize if my question is inane (and I am sure that it is). But I don’t have time sign up for night courses in economics and I really want to understand this. I understand the idea that competition drives improvements in productivity, and productivity is what enriches a nation. But I don’t see how investment fits into the picture. I know that there is some controversy between the German and American business communities concerning who has the best banking model. The Germans claim they can take a longer view, because they are not held accountable for short-term profitability. By “longer view” I assume that they mean that they can invest their profits without the expectation of immediate returns whereas anglosaxon shareholder capitalism emphasizes the maximization of profits in the short term. Now, I have heard of opportunity costs and I get just as annoyed as any economist would whenever I hear people talk about the “long term” benefits to the public of giving them some kind of subsidy or free ride. Nevertheless, from the point of view of Economic Theory, if it is competition that squeezes profits and forces firms to look for ways to be more productive, why don’t these firms find their ability to improve their productivity hampered by the fact that the same competitive pressure is squeezing their profit margins and therefore the surplus capital they need to invest in order to improve themselves? Sorry for the turgid sentence.
    – John Strong

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