In microeconomics, competition is influenced by five factors: product features, the number of sellers, barriers to entry, information availability, and location. Each factor hinges on the availability or attractiveness of substitutes, and most markets lie somewhere between perfect competition and monopoly.
Key Takeaways
- From a microeconomics perspective, five factors can affect competition.
- A monopoly exists when a company has a unique product with no competition.
- Most markets operate between a level of perfect competition and monopoly.
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1. Product Features
Product features describe its level of differentiation. If a company's product is similar to others already on the market, the good or service is indistinguishable from products sold by competitors. This situation would imply heavy competition. Alternatively, a product might be completely differentiated or unique with low levels of competition.
2. Number of Sellers
The number of sellers impacts competition. If there are many sellers of an undifferentiated product, competition is considered high. If there are few sellers, competition is low. If there is a single seller, the market is regarded as a monopoly.
3. Barriers to Entry
Barriers to entry can influence the number of sellers. Market characteristics such as high capital investment requirements or heavy regulation may prevent new companies from entering the market, which in turn provides a level of protection to existing firms. With lower competition through barriers to entry, firms will be able to charge higher prices.
4. Information Availability
Information availability revolves chiefly around price discovery. When customers can efficiently and accurately define prices across competitors, companies are unable to set prices, and competition is robust.
5. Location
A proactive location strategy can corner potential customers and reach them more effectively than the competition. For example, gas stations are often strategically located on busy corners.
Levels of Competition
Most markets are somewhere in between perfect competition and monopoly. In perfect competition, each firm's marginal profit equals marginal cost. There is no economic profit. In a monopoly, the marginal profit equals marginal revenue, which is the incremental revenue generated from selling one more unit.
Companies in perfect competition are considered price takers, meaning that they have no scope to set prices, the reason why marginal profit is equal to marginal cost. Perfectly competitive markets are defined by a hom*ogeneous product, many sellers with low market share, and no barriers to entry or exit. These firms cannot differentiate their products, and their customers have highly accurate information.
A monopoly involves a single company dominating the entire market. In this situation, the firm sets the price, and the competition is nonexistent.
What Is an Oligopoly?
The market for soft drinks, dominated by Coca-Cola and Pepsi, could be considered an oligopoly, where a few large firms dominate most of the market. The market for tomatoes could be considered a step or two above perfect competition; after all, some people are willing to pay more for organic or heirloom tomatoes, while others look only at the price.
What Agency Monitors Business Competition in the United States?
The Federal Trade Commission enforces non-criminalantitrust lawsin the United States, preventing and eliminating anticompetitive business practices, including coercive monopolies. The agency engages with competition and consumer protection entities in other countries to monitor deceptive and anticompetitive business practices that affect U.S. consumers.
What Is the Difference Between Microeconomics and Macroeconomics?
Macroeconomics looks at how the overall economy works and studies employment, gross domestic product (GDP), and inflation. Microeconomics is concerned with the effects of supply and demand in individual markets for goods and services.
The Bottom Line
Most markets engage somewhere between true competition and monopoly. Microeconomic factors that affect competition include a product's features and the number of sellers. In the U.S., the Federal Trade Commission works to eliminate anticompetitive business practices.
