Modules E F G Advanced competition models and Market vs regulation

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1 Module E- Advanced competition models: We studied competition without focusing on the strategic dimension but on the structural dimension. The structural dimensions are: 1) Number of firms: How many firms are there in an industry? If there are few firms competition is low, if there is just one firm there is a monopoly, while with many firms competition is high; however the number of firms is not enough to describe how much is competition, it also depends from the size of the firms. 2) Concentration: Takes into consideration the size of the firm: The industry is concentrated if there are few firms and less concentrated with many firms. 3) Product differentiation: There are some goods that are called commodity for which the possibility of differentiation is very limited. Some other goods (clothes, shoes..) have high possibility of differentiation. How much can I make my product different from my competitors? It is a structural dimension of competition. If I can differentiate a lot competition is higher while with less differentiation competition is lower. 4) Entry barriers: Entry barriers are obstacles which impede to firms outside the industry to enter it. If the entry barrier is high, it is difficult to entry the industry so competition is lower. If entry barriers are low any firm can entry the industry. Why is competition important? It is an essential force in economy, if an industry is competitive, there are many benefits: 1) Increase efficiency: firms cannot increase price if there is a lot of competition, so the price lever is used in a limited way. In this sense, we can work on the cost side of the profit function -> By reducing cost in order to be more efficient. 2) Fosters innovation and increases quality; 3) Promotes a better allocation of resources: it is…