In a previous video, we introduced this number line concept to think about market structure. The number line is the number of firms in an industry when there's only one firm we call that monopoly, if there's lots and lots and lots of firms we call it competition. And today's video, we want to start thinking how we go ahead and model competition. And so what we're going to do is we're going to figure out how to explain what competition is all about. What we're going to do is we're going to figure out how to explain what competition is all about. And as you can see, I've got four, I'm going to fill this table out. There's four different characteristics. We don't really have as much of a definition for competition as what we have is the conditions we would need to have to make it a competitive market. We're not really going to come up with a definition for competition. But instead we're going to outline four different conditions, which if all four of those conditions holds we can be confident the outcome will be what we call competitive, all right? So we're going to go through these one at a time and these assumptions, I want to point out one thing here this word. Word perfect competition means it's a special type, perfect competition means that it's a very special type of competition. It's going to meet all four of these characteristics and we're going to talk about how relevant and how realistic that is when we get done. But it's okay because we're just setting up some rules that will allow us to build an outcome, an equilibrium outcome and then we'll come back and modify those rules to maybe make a little bit more realistic as to what happens in the real world. So the first one, the first condition is we need a large number of relatively small buyers and sellers. We need a large number of relatively small buyers and sellers, okay. So if you think about this, what we mean here is we don't want to have anybody have market power over the other side. So we don't want to have one firm that has like say 40% of the market and then a thousands of other people who all have real small shares, okay? That's not going to be a good outcome, it could happen, and we can in fact write papers about that and do research about that. But right now we're saying we want all the buyers to, want lots and lots of buyers, but nobody who has a dominant position. We also want, I'm sorry, what we're saying is we want lots and lots of buyers and sellers. So we don't want any one seller to have dominant market size so that they can say push around the others. We want them all to be relatively the same size as far as sellers and we also need that for buyers. Because we don't want to have a situation where the market has say one major buyer and and lots of small buyers. We have situations like that in the real world in the United States for exampl. Vaccines have, the US government's one of the major purchases of vaccine almost half of all the vaccines that are produced are bought by government. And so that makes them a big buyer and that means they can somehow sometimes use that dominant size to manipulate prices in a way that makes it easier for them to get their hands on these vaccines, okay? Second condition, homogeneous products, okay? Homogeneous products means that we want products that are the same, think about generic products. Number two, red winter wheat, corn, oil, okay? These are all sort of relatively generic products, everybody's got pretty much the same product. We're not talking here about craft beers or we are not talking about products where people like Larry has like, I have a I have strong opinions about how good, which are the best candy bars to get, which ones are very good at all. Those are differentiated products, they're not just sort of generic products, okay? So we need second condition the third condition, is we need free entry and exit, okay? Now, what we mean by this is not that it's costless, okay? You're going to have to still build a plant. You're going to have to buy a storefront if you're going to enter in some industry, okay? We're not saying that it doesn't cost you any money, we're just saying that there's no rules or regulations against it. So we don't want to have an industry where for example there's a maximum number of players who can get in and that's it. Here in town and Champagne as are most college towns in the midwest, we have an active bar scene, okay? We have 48,000 students on campus and a lot of them want to have a drink and owning a bar is a pretty lucrative operation here, but you can't just go in and do it. There's only a limited number of liquor license in town, the mayor decides how many those are and the people who have them, that's it. You can't just decide to open up your own bar, you have to somehow acquire a liquor license. Hope that buy somebody else out or or maybe the city will decide to they're going to start issuing more because of the population of students has grown so much in the last two years. I don't know, but we don't worry them get stuff out here. We want to have free for you to enter or exit, no restrictions. And the last thing, we want to talk about perfect information, we want there to be good well known information. We don't want people to be confused. We don't want people to make mistakes because they didn't know, I didn't know you could get there for that price. Those things are very important markets and we'll talk a bit about that. But in this particular case, we're assuming that everybody has great information. Now, these are what we call, is what you would call restrictive assumptions. Restrictive assumptions are assumptions that are by their very nature. They're actually forcing some outcomes, okay? So if you relax that assumption the outcome would change, okay? And restrictive assumptions are, so the question we want to ask is, are there any real industries that fit this case? Are there any industries that kind of fit this model? And the answer is not that many, okay? These are really hard sets of conditions that the industries, there are industries that look closely like they might look like they might be competitive but somehow at least one of these gets changed. And so let's think about it, can I give you an example and what I'm going to do is I'm going to talk about something that's near and dear to those of us in Central, Illinois Corn, all right? Think about the market for corn. So let's talk about the first one large number of relatively small buyers and sellers. That's definitely true, corn producers there are lots and lots and lots of corn producers in the United States a lot of corn produces i the United States. And they're all relatively small and what do we mean by relatively small? Well, let's find the largest corn farmer in the state of Illinois, the largest corn farmer in the state of Illinois. And tell that corn farmer to triple their production. So take the biggest farmer you know and let that farmer triple his or her production. What's going to be the impact on the price of corn? Zero, it's like a small bug landing on Lake Michigan setting out some ripples. That's it, there's nothing, okay? There's nobody large enough to have any impact of that, okay? They can be huge, a big big, big firm, but they're just small each is really really small relative to the grand scheme of the millions and millions and millions of acres of corn, okay? Think about homogeneous products, identical products. Well, corn is corn, pretty much the corn we produce is the same corn that Brazil produces. It's the same corn that Canada produces, field corn is field corn, it's a generic product. Think about free entry and exit. Well, that's certainly the case there's no restrictions. In fact farmers right now in the in the midwest have been making some hard decisions about whether or not they're going to produce more corn or more soybeans. If they've got like 6,000 acre farm are they going to put 3000 in corn and 3000 in soybeans or 5,000 in corn and 1000 on soybeans. So they can move around very freely on any given year in terms of what type of industry they want to be in. And finally, perfect information. Now there is a lot of information about corn. In fact, I actually grew up in Illinois on a small farm. So it's dumb, I'm not surprised by it but here at we are a major university and we have faculty that come from the West coast and East coast and they are really spending time in the midwest before. And when the faculty get here, they'll often times say hey, I can't believe how many times a day they tell us the price of corn 15 times in a radio station, they'll quote the price of corn. That's true, there is a lot of information out there in the corn market and so it's a market that probably has as good information as any market you can imagine. So corn is an example that pretty much fits perfect competition. It pretty much has all of these things going for it but again, it's a little bit hard to push those into other sectors, okay? That's it.
