THE NATURE OF IMPERFECT COMPETITION

In analyzing the determinants of’ concentration. economists have found that three major factors are at. work in imperfectly competitive markets. These factors are economies of scale, barriers to entry. and strategic interaction (the first two were analyzed in the previous chapter arid the third is the subject of detailed examination in the next chapter) Costs. When the minimum efficient size of operation for a firm occurs at a sizable fraction of industry output, only a few firms can profitably survive and oligopoly is likely to -result. • Barriers to competition. When there’ are large
economies of scale or government restrictions to -entry, they will limit the Weinberg of competitors in an industry.

Strategic interaction. When only a few firms operate in a market, they will soon ‘recognize their interdependence. Strategic interaction, which is a
genuinely new feature of oligopoly that has Inspired the field.of game theory, occurs when each firm’s business depends upon the behavior of its
rivals. Why are economists particularly concerned ‘about industries characterized by imperfect competition? The answer is that such industries behave in certain ways that are inimical to the public interest. , For example, imperfect competition leads to prices that ate above marginal costs. Sometimes

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