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(the subject) — on the one hand, and consumers (the object) —
on the other one. It means that there should exist different
competitive methods and forms, and that they produce different
effects. Competition forms are as follows.
1. With regard to industry.
Intra-branch competition is a sort of struggle between
producers of the same type of goods for the most advantageous
conditions of their production and sale. It enables a single market price for goods as well as a performance improvement of
an enterprise. It also stimulates technical progress.
Cross-industry competition is a kind of struggle between
enterprises of different industries to broaden their profit margins, for its profitable investment. It enables spontaneous modulation of the funds, makes producers leave a low-profit industry and enter some high-profit industry. In a number of industries where production has decreased, the demand exceeds sup-
ply, the market price rises — the profit margin increases until it
reaches an average level. As a result, there is an agreement be-
tween profit margins and an average profit, which equals man-
ufacturing investments.
2. With regard to goods.
Subjective competition is a sort of competition either be-
tween goods of one assortment group or between similar goods
aiming to satisfy the same demand. These goods, as a rule, differ only in their quality.
Functional competition is a kind of competition between
goods substitutes. It happens because the demand can be satisfied in different ways (for example, boats, bicycles, cars, etc.
can be suitable for tourism).
3. With regard to its intensity.
Attractive competition implies that one segment either
satisfies the demand more qualitatively or gets more profits
than the other one.
21
Moderate competition is a type of struggle where the ac-
tions of competitors ensure a competitive environment in this
segment of the market.
Fierce competition happens when the subject absorbs,
destroys or forces out the object out of this segment ("war of all
against all").
4. Competition methods.
In terms of a decrease in price (price competition). Ex-
amples of such competition methods are discounts, seasonal
sales, local (i.e. depending on a region) changes in prices,
dumping, etc.
Nowadays, price competition is used in the following
situations:
• to make new goods enter the market;
• to strengthen the positions if sales problems suddenly
aggravate;
• price-competition methods are used by firms-outsiders
in their struggle against monopolies (because firms-outsiders
are not powerful enough to compete with them on a non-price
competition basis).
With regard to the quality of goods. It is a more effective
form of competition. Revenues coming for a commodity of a
higher quality complicate competitors’ response acts, as quality
improvement is a long process requiring an accumulation of
economic, scientific and technical data.
In terms of the quality of services. It is performed through
creating after-sale service centers.
In terms of reductions in operating costs (fuel consump-
tion, electric power, time use, etc.).
Integral competition develops when all available compet-
itive advantages are used.
Competition levels:
• local (within a group, department or organization);
22
• regional (within a city, region, or area);
• national (within a country);
• international (in several countries);
• global (competition within a transnational corporation).
Literature
1. Kozyrin, A. N., Shepenko, R. A. Konkurenciya na
mezhdunarodnyh rynkah. — M. : Mezhdunar. otnosh.,
1999. — 147 p.
2. Porter, M. Competition. — M.: Williams, 2005. — 495 p.
3. Porter, M. International competition. Competitive ad-
vantages of the countries. — M. : Mezhdunar. otnosh.,
2000. — 429 p.
4. Salen, P. Competition. — SPb : Neva, 2004. — 96 p.
5. Sio, K. K. Managment economy. — M. : INFRA-M,
2000. — 671 p.
6. Fathutdinov, R. A. Konkurentosposobnost': ehkonomi-
ka, strategiya, upravlenie. — M. : INFRA-M, 2000. — 570 p.
7. Udanov, A. U. Konkurenciya: teoriya i praktika. — M. :
AKALIS, 2006. — 272 p.
Questions for self-check
1. What are the advantages of the market economy indi-
vidualism?
2. What serves as a counterbalance of the market econ-
omy individualism?
3. How is the selectivity of the competitive mechanism
revealed?
4. How is the flexibility of the competitive mechanism
revealed?
23
5. In most cases, the introduction of the seller into the
market is more preferable than the introduction of the buyer,
isn’t it?
6. Do you agree that limited demand makes firms com-
pete with each other?
7. What are the main methods of competition?
8. Is it true that an increase in competition is positively
related to the costs for leaving the market?
9. In what industries can price competition be observed?
24
CHAPTER 2.
COMPETITIVE MARKETS, COMPETITION
AND COMPETITIVENESS
2.1. THE STRUCTURE OF COMPETITIVE MARKETS
In economics, the following classification of market
structures is accepted. The simplest and most important classi-
fication reflects the degree of impact of a certain seller (buyer)
on a market price. In this respect, one should distinguish "perfect competition" when none of the producers can affect
changes in market prices, and "imperfect competition" when
this condition is violated and a firm (or a group of firms) possesses some market (exclusive) power. It means that a firm can
influence prices through changing the amount of the goods
supplied. Imperfect competitive markets include a monopoly,
oligopoly and monopolistic competition.
The terms used to identify different types of market structures derive from the Greek words signifying the subjects’ relationship to one of two participants of the market — to sellers or
buyers: I (sell) poleo and I (buy) psoneo, mono (one), oligos (a
little) and poly (a lot of). The combination of these words will
make it possible to receive the simplest and most general classifi-
cation of the types of market structures. A classification like this
has been offered by the famous German economist G. von
Shtakelberg (1934). It is presented in Table 2.1. This classification
(with insignificant changes) can and should be incorporated into
the curriculum of microeconomics (mainly in German).
One of the main characteristic features of the classification given in the mentioned Table is that it does not include
those structural types of market that are well-known from the
relevant Anglo-American literature, namely the markets of per-
fect and monopolistic competition. It is easy to explain. After
all, both of them are present in any market where there are a lot
25
of buyers and sellers and therefore both of them can be carried
Buyers
many
a few
one
Bilateral
polipoliya
Bilateral
oligopoly
The monopsony
confined to oligopoly
The
oligopoly
to a bilateral polipoliya. The difference between them has to do
only with the features of supplied goods. If the goods are ho-
mogeneous, the bilateral polipoliya has to do with perfect com-
petition. If the goods are heterogeneous, the bilateral polipoliya
becomes more like monopolistic competition.
Table 2.1
The types of market structures according
to G. von Shtakelberg
Sellers
many
Oligopsony Monopsony
a few Oligopoly
one Monopoly
monopoly
confined to
Bilateral monopoly
In the 1950–1960s, E. Chamberlain and J.Beyn, Harvard
economists, offered another theory, based on three parameters
that are possible to calculate. It is a formalized classification of
structural market types.
E. Chamberlain suggested using two criteria to classify
markets — interchangeability of the goods supplied by different
enterprises and interdependence of these enterprises. The first cri-
terion can be provided by the coefficient of cross price elasticity
of the goods demanded that are supplied by enterprises i, j:
26
i
j
j
i
q
ji
q
p
p
q
e ⋅
∂
∂
=
,
, (2.1)
ijj
i
q
ji
p
q
q
p
e ⋅
∂
∂
=
,
C
CL
P
PÐÅ−
=
the second one — volume efficiency, or quantitative
cross elasticity:
. (2.2)
The first one describes the influence of changes in price
of the j enterprise on the sales of the i, while the second one
describes how the sales of the j enterprise affect the prices of
the i enterprise. The higher the price cross elasticity (2.1), the
more unified are the goods produced by these enterprises, and
the more prefect is their interchangeability. The higher is the
volume (quantitative) cross elasticity (2.2), the tougher is the
interdependence of enterprises. If it is close to zero, each seller
can ignore the competitors’ reaction to its actions, no matter
how many they are in the market and whether these goods are
substitutes or not. If the volume crosses elasticity is high, the
interdependence of the sellers is considerable: none of them
can ignore the reaction of the others even if the goods supplied
in such markets are very heterogeneous.
J. Beyn added one more criterion to those offered by
E. Chamberlain –market entering conditions (market entrance
conditions). These criterion (E) is generally defined by a rela-
tive excess of the actual price (PL) over competitive price (PC)
equal to average long-term total costs:
. (2.3)
The higher is the value E, the more attractive is the mar-
ket to new sellers, the more probable is their entry to the mar-
27
ket and vice versa: the lower it is, the less attractive is the mar-
p
jie,
Interdepen
q
ji
e
,
Perfect
competition
∞→
0→ 0→
Monopolistic
competition
0,<<
∞−
p
ji
e
0→ 0→
Homogeneou
s oligopoly
∞→
0,<<∞−
q
ji
e
E > 0
Heterogeneo
us oligopoly
0,<<∞−
p
ji
e
0,<<∞−
q
ji
e
E > 0
Monopoly
0→ 0
→
Entrance is
blocked
ket and the less probable is their entrance. It is important to
note that if the market is attractive, enterprises that has entered
the market can use natural or man-made barriers to prevent
new sellers from entering the market. In particular, in a mo-
nopolistic market, E> 0 as a rule, but nobody can enter a mo-
nopolistic market, and nobody threatens this monopoly.
A classification of goods markets based on these three
criteria is provided in Table 2.2.
Table 2.2
Classification of goods markets by
E. Chamberlain and J. Beyn
A structural
market type
Interchangea
bility of goods
(
)
dence of
enterprises
(
)
Entrance
conditions
A great number of market forms existing in a real life are
not confined to the five structural market types specified in the
table. Economic theory tries to make a variety of market forms
possible to understand. According to W.Eucken, elaborating
28
this morphological device, it (economic theory) tries to make
things simpler thanks to grouping a variety of specific forms
within pure (perfect) forms the number of which is limited and
characterized by simpler properties. Thanks to it, it is possible
to describe economic processes, despite their variety observed
throughout history.
By the terms of perfect and monopolistic competition, we
mean monopoly and oligopoly of non-real markets, but their
"net forms", ideal models, often called theoretical market con-
structs of different structures. A set of these models provides
theoretical tools for analyzing specific real markets and, if necessary, elaborating certain regulating or deregulating measures.
2.2. A MARKET OF PERFECT COMPETITION
In economic theory, perfect competition is a market organization form that excludes all types of rivalry between both
sellers and buyers. Thus, by recognizing perfect competition
we actually refuse to understand competition in a typical and
common way — as a keen rivalry of economic agents. This
view is characteristic of business practices and everyday life.
Perfect competition is perfect in the sense that this market organization type implies each enterprise’s being able to sell as
many products (at market price) as it wants, and neither a certain seller, nor a certain buyer will ever be able to affect the
rate of the market price.
The concept "perfect competition" plays a special role in
economic theory. It has to do with the fact through studying the
market of perfect competition we can explain situations that do
not meet the criteria of this structure. A perfect competition
market (that is often referred to as net competition) is a com-
mon situation that serves as a guide of initial reference to and
efficiency evaluation of real economic processes.
29
Assumptions of perfect competition
∞→⋅
∂
∂
=
qipp
q
e
j
j
i
ji,
The model of perfect competition is based on a number
of assumptions concerning market organization.
1. Uniformity of products. Uniformity of products means
that all its items are absolutely identical from buyers’ point
view. The number of all enterprises supplying some homoge-
neous product forms an industry. An example of homogeneous
products is standard goods that are usually available at specialized commodity exchanges. Standard goods typically include
different types of primary goods (cotton, coffee, wheat, oil of a
certain kind) or semi-finished products (steel, gold, aluminum
in bars, etc.).
Homogeneous products are provided by different pro-
ducers (or suppliers) and, though identical, can be easily distinguished by buyers by a trademark, logo or source of manufacturing or some other characteristics if they are important to
buyers. Thus, the anonymity of sellers in combination with the
anonymity of buyers make the market of perfect competition
absolutely depersonalized.
A perfect interchangeability of homogeneous products of
different enterprises means that the cross elasticity of demand
for it (at a price for any substitute provided by other enterprises — producers) is close to infinity:
, (2.4)
where i and j stand for enterprises that are producing homoge-
neous products. It means that if an enterprise has a small price
advantage over the market price, it will cause changes in de-
mand for these products at other enterprises.
2. Insignificance and plurality. Market participants’ in-
significance means that the quantity demanded and the quantity
30