2.1.2 Effective Competition
Effective competition occurs in economic markets when four major market conditions are present: - Buyers have access to alternative sellers for the products they desire (or for reasonable substitutes) at prices they are willing to pay,
- Sellers have access to buyers for their products without undue hindrance or restraint from other firms, interest groups, government agencies, or existing laws or regulations,
- The market price of a product is determined by the interaction of consumers and firms. No single consumer or firm (or group of consumers or firms) can determine, or unduly influence, the level of the price, and
- Differences in prices charged by different firms (and paid by different consumers) reflect only differences in cost or product quality/attributes.
In effectively competitive markets, consumers are protected to some degree from exploitative prices that firms, acting unilaterally or as a collusive bloc, could charge. Likewise, firms are protected from manipulation by large individual consumers (or groups of consumers) and from disruption or interference from other firms. Competition occurs on the basis of both price and the quality or features of the product. Products are often differentiated, that is they are not identical across firms. One form of a product is usually a reasonable substitute for another form of that product. This is often referred to as “functional equivalence”. Sellers may also offer product combinations or bundles that appeal to specific consumers or consumer segments. Effective competition can occur even in markets with relatively few firms that differ substantially in size, market share, and tenure. However, for such markets to be competitive, it is important that there are no barriers to entry and exit.
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