In micro-economic textbooks, the main factor assumed to affect the quality of a market is the number of sellers. A single seller, termed a monopolist, is the worst because that seller has maximum power to affect price. At the other extreme, a market with so many sellers that no one of them could affect the price – termed “perfect competition” – is the best because it minimizes the price paid by the buyer.
This approach – with its implication that more sellers benefit buyers – fails to consider that sellers with many competitors have an incentive to differentiate their version of the product from those of other sellers. This creates the risk of a bad selection by a buyer, which may be avoidable only by incurring significant information costs.
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