A. PATTERNS OF IMPERFECT COMPETITION
he major kinds of imperfect competition are monopoly. oligopoly, and monopolistic competition. We shall see that for a given technology. prices are higher and outputs are lower under imperfect competition than under perfect competition. But imperfect competitors have virtues along with these vices. Large firms exploit economies of large-scale production and are responsible for much of the innovation that propels long-term economic growth. If you understand how imperfectly competitive markets work. you “ill have a much deeper understanding of modern industrial economies. 11at exactly is perfect competition? Recall that a perfectly competitive market I! is one in which no firm is Iarge enough to affect the market price. By this strict definition, few markets in the V.S. economy are perfectly competitive.
Think of the following: aircraft, aluminum. automobiles. computer software. breakfast. cereals, chewing gum. cigarettes. electricity distribution, refrigerators. and wheat. How many of these are sold In perfectly competitive mark~ts? Certainly not aircraft. aluminum. or automobiles. Until World War II there was only one aluminum company. Alcoa Even today. the four largest L’ .5. firms produce three-quarters of LS. aluminum output. The world commercial aircraft market is dominated by only two firms. Boeing and Airbus. In the automotive industry. too, the top five auto makers (including Toyota and’ Honda) have almost 80 propeller of the l’.S. car and light-truck market. In the software industry, there is tremendous innovation, yet most software applications. from tax accounting to word processing. are ones In which a few firms dominate the market.
What about breakfast cereals. chewing gum, cigarettes. and refrigerators- These markets are dominated even more completely by a relatively small number of companies. Nor does the retail market in electricity meet the definition of perfect competition. In most localities, a: single company distributes all the electricity used by the population. Very few of us will find it economical to build a windmill to generate our own power! Looking at the list above, you will find that only heat falls within our strict definition of perfect competition.
All the other goods, from autos to cigarettes, fail the competitive test for a simple reason: Some of the firms in the industry can affect the market price by changing the quantity they sell. To put’ it another way, they have some control over the price of their output.
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