The Degree of Competition within Markets

Economic competition, or rivalry among competitors, often leads to

lower prices and the introduction of differentiated products. For exam-

ple, videocassette recorders sold for more than $1,500 when they were

introduced. After a few short years, the price dropped to less than 20

percent of that figure. In addition, the first videocassettes could record

only two hours of programming, but today eight-hour videocassettes

are available from numerous new competitors. Cellular telephones have

gone the same route.

Foreign and domestic competition influences the interaction of sup-

ply and demand forces. The degree of competition varies widely from

industry to industry. Some industries are extremely competitive, with

numerous competing firms, while others are dominated by one or two

companies with large shares of the market. The competitive market

structure of an industry–that is, the number of competing firms and the

size of the market each competitor holds–strongly influences business

strategies. Pure competition, monopolistic competition, oligopoly, and

monopoly are the four basic types of competitive market structure.

Pure competition exists when there are no barriers to competition.

Many small competing firms offer almost identical products, and there

are many buyers. This means there is a steady supply of and demand for

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the product, and therefore the price is controlled by neither the buy-

ers nor the sellers; rather, the forces of supply and demand determine

prices. An individual producer can make more money by producing and

selling more.

The principal characteristic of monopolistic competition is product

differentiation—a large number of sellers, for example, selling similar

products differentiated (distinguished) by only minor changes in prod-

uct design, style, or technology. Firms engaged in monopolistic compe-

tition have enough influence on the marketplace to exert some control

over their own prices.

Oligopoly, the third type of market structure, is an industry controlled

by a few large firms. The distinguishing characteristic of an oligopoly,

however, is not the size of the company as measured by assets or sales

volume but its control over the marketplace as measured by its share of

the market. Each company in an oligopoly has a strong influence on

product offering, price, and market structure within the industry.

Industries with only one producer firm are called monopolies. In a

monopoly, no substitute products are available and the monopolist may

charge any price. The monopolist will set the price to maximize its profits.

Look through the text once again and characterize each type of competi-

tive market structure. Give your own examples.

Text 6

Read and translate the following terms: peak, boom, recession, capacity utilization

rate, expansion, unemployment rate, downturn, depression, trough, upturn. Read the

text and be ready to explain what each of them means.

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