Questions for Review with Answers
Chapter 13. Competition Theory I. Perfect Competition
I. Basics
Chapter 13 – Question 1
What are the criteria for perfect competition that of all of an industry's firms must fulfil?
* The conditions that economic theory stipulates for perfect competition are: homogeneity of products and hence pure price competition, low entry barriers, large number of price-taking sellers and marginal-cost pricing.
Chapter 13 – Question 2
What are indicators of stiff competition in economic reality?
* Large firms, a high degree of product differentiation, and sophisticated advertising.
Chapter 13 – Question 3
Why do perfect competitors not compete?
* Competition is the fight for market shares. Perfect competitors are faced with unlimited demand. Their only constraint consists in their production costs. When MC = MR, they cannot increase output any further, so why should they try to increase their market share?
II. Perfect Competition and Economic Theory
Chapter 13 – Question 4
Why do economists need the idea of perfect competition to build models?
* Perfect competition allows them to analyse one single isolated firm. Economists then conclude that the whole economy consists of such firms. Real-world competition takes place between huge firms, each with a different profit and marketing strategy. Such firms influence each other, their behaviour is strategic, i.e. they take their rivals' responses to their own decisions into account and they often collude. The variety of behaviour that is typical of real-world firms cannot be analysed by a simple mathematical model.
Chapter 13 – Question 5
Which buyer-friendly conditions are the result of perfect competition?
* Transparency, which stands for maximum choice, maximum information and optimum comparison. Other advantages for consumers are marginal-cost pricing and maximum consumer surplus.
III. Perfect Competition and Economic Reality
Chapter 13 – Question 6
Why are banking, hypermarkets and industries where tenders are common not really examples of perfect competition?
* They sell homogenous products but that's all what they have in common with the micro model firm. Banks enjoy very much power and are highly suspect of collusion. Hypermarkets tend to offer a mixture of special offers and overpriced products. As each of them offers a different mix, comparison becomes a full-time job. In industries like construction, where tenders are common, corruption is also quite common.
Chapter 13 – Question 7
Is e-business an example of perfect competition?
* It fulfils a large number of the criteria for perfect competition and offers one additional advantage: The behaviour of participants is graded. On the other hand, there is a great deal of price discrimination. Once companies have the data of customers, the offers made to them are chosen according to the purchasing power of customers.
IV. Ways of Avoiding Perfect Competition
Chapter 13 – Question 8
How do suppliers reduce the number of competitors and competing products?
* Through protectionism and vertical restraints.
Chapter 13 – Question 9
What do they do to pretend product or producer variety or to impede comparison?
* Firms pretend product variety by concealing homogeneity through advertising, different packaging and different prices. They pretend producer variety by concealing the affiliation of companies or strategic alliances between firms. They impede price comparison by differentiation.
V. An Excursus on Darwinism and Social Darwinism
Chapter 13 – Question 10
Explain the historical linkage and theoretical analogies between social Darwinism and Darwinism.
* The historical linkage is that social Darwinism provided Darwin with the clue to his findings. There are numerous theoretical analogies: The backdrop for both theories is scarcity. It is explained by excessive procreation. Competition as a primary law governing life is inferred from this. Competition leads to the elimination of the weaker members of a species and the procreation of the stronger ones.
If you like, print this page for offline comparison or studying.