Copyright 2002 TecEd

Price Setting 1
Competition Strategies

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The degree of competition simply means how many competitors exist in a market: is it highly competitive with many other businesses or is it easy to dominate the market as few serious rivals exist? Economists have a way of classifying the degree of competition in the market. It depends on a number of factors, but the key ones are:

• Number of firms in the market: how many businesses are in the market compared to the size of the market?
• Barriers to entry: how easy is it to set up in business?
• Product differentiation: how different are the products offered by each of the businesses in the market?
• Information: how easy is it to find out what the other businesses are up to?

Two extremes to this degree of competition exist:

• Perfect Competition is a situation with a very high degree of competition where:
• you have many firms in the market compared to the size of the market;
• it is very easy to set up in business as “start up” costs are small;
• the products produced by each firm are very similar and you have almost no product differentiation;
• it is easy to find out how other businesses operate and no secrets exist about how products are made/provided.
• Monopoly is a situation with almost no competition where:
• only one business is in the market;
• it’s very expensive to set up in business as start up costs are very high or some other “barrier to entry” exists
• the product produced by the firm is unique - as no other business is in the market, no other products are made!
• it’s very difficult to find out how this monopoly business makes its products - secrecy surrounds the process!

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