Why doesn't the demand curve an individual firm faces in a perfectly competitive market have the same elasticity as it does in a oligopolistic market?

Under perfect competition, if a firm increases its price fractionally, consumers will turn away from it and look for alternatives. On the flip side, if a firm reduces its price fractionally, it can capture the entire market. So why wouldn't other firms follow in footstep like they do in a oligopolistic market?


2 Answers 2


There could be many answers, but the one that comes to my mind immediately is product differentiation. If you're selling exactly the same thing as everyone else, buyers are going to flock to the lowest price buyer, so you everyone will have to follow a price cut. But say you are selling ice cream cones on the boardwalk at the beach. Any little thing, such as a slightly better location, a better selection of flavors, or a cheerier clerk scooping the cones could be enough to let you keep a good chunk of your customers without cutting the price.

BTW, even a slight perceived difference among sellers would (technically speaking) make the market an oligopoly, not perfect competition. In perfect competition, by definition, there can't be any differences. That is why we call perfect competition an "ideal type," not a description of real-world markets.

  • $\begingroup$ Thank you for your answer. But as far as I know, in perfect competition the firms will not follow the price cut, while in oligopoly it is expected to see the firms jump on the bandwagon as one of them cut its price. $\endgroup$
    – Ethereal
    Commented Feb 4, 2021 at 15:43
  • $\begingroup$ Under the admittedly artificial conditions of perfect competition (perfect information, same technologyetc.) no rational firm will reduce its price unless underlying conditions change , e.g., a change in the price of an input or a shift in demand. By assumption, any such change will affect all firms simultaneously,. If a single firm irrationally reduced its price when there was no reason to do so, it is true that other rational firms would not follow, but rationality is assumed in perfect competition, so that can't happen. $\endgroup$
    – Slopezian
    Commented Feb 4, 2021 at 16:50
  • $\begingroup$ Not sure what you meant by "capture the entire market" since each producer makes up a small part of the market. $\endgroup$
    – Daniel
    Commented Feb 17, 2021 at 17:29

In a perfectly competitive market, a manufacturer can reduce prices in the short term, and there will be profits, other manufacturers will see a profitable influx of the market, price war, but when prices fall below cost, manufacturers will find that even if there are more sales will still lose money, and eventually some manufacturers will exit the market, leaving manufacturers and consumers to reach a long-term equilibrium. Eventually the average profit = marginal cost = average cost, no party is willing to raise prices, and no party is willing to reduce prices, the market reached a long-term equilibrium. So in the short term, a single manufacturer will reduce prices, but in the long run will not reduce prices.

  • $\begingroup$ "In a perfectly competitive market, a manufacturer can reduce prices in the short term, and there will be profits" --- This is clearly wrong. $\endgroup$
    – Herr K.
    Commented Jul 12, 2022 at 14:29

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