Does MasterCard compete with Visa? Does a wheat farmer from Biggar,
Saskatchewan, compete with a wheat farmer from Brandon, Manitoba? If
we use the ordinary meaning of the word compete, the answer to the first
question is plainly yes, and the answer to the second question is no.
MasterCard and Visa both advertise extensively to persuade consumers to
use their credit cards, so these two firms actively compete against each
other, with additional profits for one firm sometimes coming at the
expense of the other.
The farmer in Saskatchewan, however, can do nothing to affect either the
sales or the profits of the Manitoba farmer. Even if the Saskatchewan
farmer could do something to influence the profits of the Manitoba
farmer, there would be no point in doing so, since changes in the profits
of the Manitoba farmer would not affect the Saskatchewan farmer.
In this chapter we examine what economists call competitive markets, in
which firms—like the farmers in the example above—do not actively
compete with one another. To sort out the questions of who is competing
with whom and in what sense, it is useful to distinguish between the
behaviour of individual firms and the type of market in which they
operate. Economists are interested in two different concepts—competitive
market structure and competitive behaviour.