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  • Print publication year: 2016
  • Online publication date: May 2018

12 - Firm strategy under imperfectly competitive market conditions

from Book IV - Competitive and monopoly market structures


Differences in tastes, desires, incomes and locations of buyers, and differences in the use which they wish to make of commodities all indicate the need for variety and the necessity of substituting for the concept of a “competitive ideal,” an ideal involving both monopoly and competition.

Edward Chamberlin

We have so far considered two distinctly different market structures: perfect competition (characterized by producers that cannot influence price at all because of extreme competition) and pure monopoly (in which there is only one producer of a product with no close substitutes and whose market is protected by prohibitively high barriers to entry).

Needless to say, neither of those theoretical structures well describes most markets. Even in the short run, producers typically compete with several or many other producers of similar, but not identical, products. General Motors Corporation competes with Ford Motor Company and a number of foreign producers. McDonald's Corporation competes with Burger King Corporation, Carl's Jr., The Habit, and any number of other burger franchises, as well as with a host of other chains in the fast-food restaurant category, Pizza Hut, Popeyes Fried Chicken, and Taco Bell.

In the long run, all these firms must compete with new companies that surmount the imperfect barriers to entry into their markets. In short, most companies competing in the imperfect markets can cause producers to be more efficient in their use of resources than under pure monopoly, although less efficient than in perfect competition. Part A of this chapter develops the theory of competition in obvious markets, those for products. Managers need to be mindful of competition in those markets, but they also must be able to operate efficiently in another competitive arena, the market for corporate control. Not only are entrepreneurs constantly on the lookout for new and better products to bolster their profits, but they also are scouting for underperforming firms they can buy at a low price, improve, and then sell for a higher price.

Markets that are less than perfectly competitive afford producers an opportunity to restrict output to raise their prices and profits, which can give rise to the type of market inefficiency discussed with reference to pure monopoly in Chapter 11.

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