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Supply & Demand

Supply & Demand

Perfect Competition

Of course, not every market operates in perfect textbook fashion. Supply and demand meet perfectly only in perfect conditions—when there is large market in which many producers and consumers compete under perfect conditions, competitors produce virtually identical goods, buyers have access to good information, and suppliers have equal access to all consumers. Newcomers to the market have to be able to afford the costs of entry and are not barred from doing so by the producers already in existence.

Economists call this perfect competition. And in the real marketplace, it is rare. Many of the most flagrant real-world impediments to perfect competition are illegal. “Collusion” between competitors is illegal; for example, agreements to charge the same price (price-fixing) for their goods is against the law. The government will also take action to prevent the formation of monopolies—the formation of a company that exercises complete control over an industry. But enforcement is imperfect, partially because certain forms of monopolies are “natural”—for example, it would be wasteful and illogical to have multiple utility companies and bus companies serving a city. Other monopolies are “geographic.” A small mountain town may be able to support only one pharmacy. Other monopolies may be based on an exclusive, patent-protected piece of technology.

An even more common impediment to perfect competition lies in the formation of oligopolies—industries that are controlled by a small number of competitors. Collusion between these companies is prohibited, but it’s very difficult, if not impossible, for a new company to join the oligopoly. New participants may be barred by prohibitive start-up costs, or they may be shut out of a market because consumer attachment to the established brands is too strong to challenge. The auto and oil oligopolies enjoy the first advantage; the soft drink oligopolies enjoy the second.

In other words, perfect competition is rare in the real world. But for the time being, as you work your way through the economic adventure, let’s pretend we live in a world of pure, unfettered competition.

Why It Matters Today

In the early 2000s, Apple introduced the iPod and the iTunes store, saving itself as a company and revolutionizing the American music business.  In the years since, Apple reinforced its strength by introducing the blockbuster iPhone and iPad, making it a huge player in the mobile device market.  Apple is now the world's largest seller of music, as well as one of the most valuable of all American companies. 

But is Apple now becoming a monopoly?

All of Apple's wildly popular mobile devices are designed for full integration into the iTunes store, making it seamless to purchase songs, movies, and apps.  But Apple also keeps tight control over what can be sold in the store.  Recently those decisions became a matter of great controversy, when the rival company Adobe complained that Apple had banned all apps that used its Flash animation software.  Is Apple using its strong position in the device market to freeze out a competing firm? (Apple says it's simply trying to maintain the stability of its devices, and that Flash isn't reliable enough.)

So is Apple just trying to keep up the quality of its products?

Or is it undermining perfect competition by using its strong position in the market to force out potential competitors?

As of early 2010, the government is investigating.  What do you think?

Sometimes, a Song Says it Better: You Belong With Me, by Taylor Swift

Competition at its finest.

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