Characteristics of Pure Competition

Characteristics of Pure Competition 1.0 Introduction Basic microeconomic theory states that firms should seek to maximize profits and that this is achieved where marginal revenue is equal to marginal cost. A number of assumptions underpin this theory, including the assumptions that firms clearly understand the nature of the demand for their products, and why people buy, and that they are willing and able to control production and sales as the model demands. In reality, decision makers do not have perfect knowledge and production and sales are affected by suppliers and distributors. However, this basic theory has resulted in the development of market models and characteristics of these in respect of barriers to entry into the industry, the number of firms in the industry, whether those firms produce a standardized product or try to differentiate their products from those of other firm. At the early 1920’s, only two distinct market models are present in the economic studies which are Pure Competition and Pure Mon opoly. However, economist found out that most firms operate in markets that fall between the extremes of pure competition and pure monopoly. These firms do not face competition from numerous rival producers all selling a homogeneous product at a single price. Instead, most firms in the real commercial world face varying degrees of competition. In some cases, there are competitions offering more or less identical products; in other instances, firms produce and sell differentiated products. In the latter case, a competitor’s product is merely an attractive substitute. In the real commercial world, there may be numerous competitor, or there may be only a few other sellers in a given market. The need of for a more accurate world for markets of this type of this type led to the development of ‘imperfect market’ to refer to such markets. Imperfect competition refers to markets lying in between the two extreme forms of markets, pure competition and pure monopoly. In ord er to bridge the gap of these extreme forms of market structure, two economists, Joan Robinson of Cambridge University of England and Edward Chamberlin of Harvard University in the U.S.A., introduced independently a third market world to explain and illustrate the theory of imperfect competition in the year of 1993. In other words, their model of market organization is what as refer as monopolistic competition. As a result of the variations between the markets present, four distinct market structures are introduced: Pure Competition, Pure Monopoly, Monopolistic competition, and Oligopoly. Pure Competiton Pure Competition is a rarity as such as a theoretical market model. Pure competition involves a very large number of firms producing a standardized, non differentiated product that is exactly identical to that of other firms as perfectly competitive. Pure Competition is a market which firms will only make ‘normal’ profits, the amount required for them to stay in the ind ustry. In Pure Competition market there are no major barriers to entry into the industry so new firms can enter or exit the industry very easily. If a Pure Competition market reaches a situation which supply exceeds demand then the ruling market price is forced down and only the efficient firms survive.

Netflix Case Study Example | Topics and Well Written Essays - 750 words

Netflix - Case Study Example Apart from this, there was also a scheme whereby any new subscriber would be allowed access t o its movie library on one month trial basis. After this the subscriber is automatically taken as a subscriber unless he cancels the subscription personally (Thompson 282). 2. Marketing tie ups- Netflix had entered into a deal with a company named Startz Entertainment and made tie ups with entertainment content providers such as Universal Studios, Twentieth Century Fox, Indie films etc that gave the subscribers an access to several new movies at the same amount they paid (Thompson 284). This move was taken to increase the popularity of the company. 3. Quick delivery to subscribers- Netflix made it a point to deliver the ordered DVDs to the subscribers within one business day after the order is placed (Thompson 286). For this, the company had formed several regional centers that helped to deliver the DVDs in a very short time. This was a strategy to increase its popularity amongst the customers. 1. The company has a fast mover delivery system on its online subscriptions. This has been done by setting regional bases in several areas. Also, by placing orders online the company made watching movies cheaper (Thompson 286). There are fewer threats from new entry into the market place and Netflix enjoyed a market leader position there. Making movie steaming and renting cheaper involves huge money and this would not be easy for any new company in a short time. (e) Degree of rivalry- the degree of rivalry can be strong as there are fewer companies operating in the market. Rivalry can also arise from other sources such as the cable and satellite companies (Thompson 281). Strengths – the strengths of the company lie on its fast delivery and huge collection of movies. The company had also got has a huge customer satisfaction as it had around 16.3 million subscribers (Thompson 287) and strong brand recognition. Weakness – the company relies on fast delivery of

Technology Sector Privite Equity and a New Speculative Bubble Term Paper

Technology Sector Privite Equity and a New Speculative Bubble - Term Paper Example Goldman intends to resell many of the shares to high net-worth individuals through its wealth management division. This â€Å"special investment vehicle† will exploit a loophole in securities law regarding private company ownership. According to US securities law, a private company is not permitted to have more than 500 individual investors without making its financial information public. Being a private company, Facebook is not required by the SEC to share financial information with investors at this time. Due to these above mentioned conditions surrounding these companies, speculation continues to be a driving force surrounding these investments. In this paper, we will take a look at the history and features of speculative bubbles including the technology bubble of the late nineties (dot com bust) in an attempt to use economic data to analyze today’s environment to detect the presence of a bubble and its potential impacts. The Origins of Speculative Bubbles Speculativ e bubbles have long fascinated and puzzled economists across many time periods. From the original Tulip Mania of the 1630’s to the Dot- Com bubble of the late nineties, these phenomena have kept economists on their toes for centuries, in trying to pin down substantive causative agents that are responsible for the swift increase in the market values of particular assets. Till today, experts have been unable to chalk down exact reasons for the emergence of such bubbles as they can rise up even in the most predictable markets; where the market participants can very accurately calculate the intrinsic value of the assets and where speculation plays no part in the actual valuation process. What is the origin of bubbles? Simply put, speculative bubbles are caused by â€Å"precipitating factors† that have the ability to bring about a change in the public’s perception about the value of an asset and about the future prospects of that asset, which can have an immediate im pact on demand (Shiller , 2000) One of the most famous economists of all time, John Maynard Keynes pointed out in his book â€Å"The General Theory of Employment, Interest and Money†, that abrupt and immediate stock price changes have their roots in the â€Å"collective crowd behavior† of the various market agents more than anything else and that in almost all such scenarios, these rises in prices have little to do with the values that can be derived from â€Å"careful analysis of present conditions and future prospects of firms†. This seems to be a certainly accurate description of the conditions which surround the emergence and bursting of the speculative bubbles as seen in the past. Kindleberger in his book â€Å"Manias, Panics and Crashes: A History of Financial Crises† (1978), presents a summary of his observations regarding the historical pattern that these bubbles usually follow. He states that the increase in prices typically starts with the emerg ence or birth of opportunity, usually in the shape of new markets or cutting edge technology or some major change in the political landscape of a particular region which can pull in investors looking for excellent returns on their investments. This is followed by rising prices of the particular asset. In this phase, more and more people rush after the overpriced commodity, feeding fuel to the bubble, increasing prices further and feeding the mania, and at the same time causing credit