Competition in a Free Market Economy

What is Competition?

Competition is the struggle between buyers and sellers to get the best products at the lowest price

Competition between sellers keeps the cost of production low and the quality of goods higher than they would otherwise be

Buyers compete among themselves to find the best products at the lowest price

Types of Competition

Pure (Perfect) CompetitionThe market condition where there is a large number of sellers that offer very similar items

Characteristics: Usually lots of small firms in market

Supply and demand set prices

Examples:Most agricultural markets

Types of CompetitionMonopolistic Competition

The market condition in which several suppliers offer a similar, yet differentiated, product (mixed between pure competition and true monopoly)Characteristics:

Each independent firm makes decision about price and output, based on cost of production, product and marketUsually many firms that sell similar products, but are differentiated Free entry and exit

Examples:Hotel business Restaurant businessConsumer Services (hairdressing)

Types of CompetitionOligopolies

The market condition in which very few suppliers offer very similar products or services

Characteristics:Few sellers forces them to be aware of one another’s decisions. Often their decision change due to other firms influence.

Products can be homogeneous or differentiated

Usually price setters

Control most of market

Entry is difficult due to government regulations or patents