Imperfect competitors compete by changing prices but also in another way:

Non-price competition: the efforts to make a product distinct from that of competitors. Examples include: Product Differentiation: making a product different

from that of competitors Advertising: provides consumer with information

6.4 Traits of Imperfect Competition

Product differentiation leads to higher prices Impact of advertising is also mixed – advertising

lessens the market power of established businesses and leads to more industry flexibility

Non-Price Competition

Don’t worry, product

differentiation is slightly more exciting than

Diamond Shreddies !

Most industries are either perfectly competitive or monopolistic

When you have an imperfectly competitive industry, it is difficult to establish whether it is monopolistically competitive or an oligopoly

Concentration Ratio: The percentage of total sales revenue in a market

earned by the largest businesses in the market

Industrial Concentration

Example: If a certain market has total annual sales revenues of

$100 million – with the four largest companies having sales of $42 million, $27 million, $14 million and $8 million – the four-firm ratio (aka concentration ratio) is:

If the four-firm ratio is: Below 50%: monopolistically competitive Above 50%: oligopoly

In this case, the industry is considered an oligopoly

Industrial Concentration

Industrial Concentration: studies the effect of market power on the economy looks at the domination of a market by one or a few

large companies Defense of Industrial Concentration:

Larger businesses can take advantage of economies of scale because they have lower per-unit costs

Debate Over Industrial Concentration