ABSTRACT
This chapter describes perfectly competitive condition which assumes away innovative behavior and applies to homogeneous goods. Departures from these conditions involve product distinctiveness, which may either be lasting or perishable. It was revealed that in the former instance firms are likely to employ a price-skimming strategy and in the latter instance a price-penetration strategy. The Clemens-Cocks model was used to provide a formal framework of what the competitive process entails, demonstrating that the process works by means of a transfer and innovation mechanism. The innovation mechanism sets competition in motion by having firms search for new techniques, whether in production, product development, organization, or operations, which will reduce total average costs. It was noted that this, which is so characteristic of economic activity, may give rise to barriers to new entry. However, an important question here is whether such barriers should be treated as synonymous with retarding rivalry.
