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8 Imperfect Competition

Imperfect competition arises when firms are price-makers rather than price-takers, allowing them to influence market prices. The major types of imperfect competition are monopoly, oligopoly, and monopolistic competition. Imperfect competitors face downward-sloping demand curves and produce at a level where marginal revenue equals marginal cost, resulting in higher prices than perfect competition. Barriers to entry and economies of scale often cause imperfect competition by limiting the number of firms in an industry. While profit-maximizing, imperfect competition is not economically efficient in the way perfect competition is.

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Christian Cedrick Olmon
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104 views6 pages

8 Imperfect Competition

Imperfect competition arises when firms are price-makers rather than price-takers, allowing them to influence market prices. The major types of imperfect competition are monopoly, oligopoly, and monopolistic competition. Imperfect competitors face downward-sloping demand curves and produce at a level where marginal revenue equals marginal cost, resulting in higher prices than perfect competition. Barriers to entry and economies of scale often cause imperfect competition by limiting the number of firms in an industry. While profit-maximizing, imperfect competition is not economically efficient in the way perfect competition is.

Uploaded by

Christian Cedrick Olmon
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IMPERFECT COMPETITION

Chapter's 9-10
Throne, Image Source:http://www.vubiquity.com/wp-content/uploads/revslider/hero_slider/throne.png, date accessed 11 February, 2017

Most markets in the economy are dominated with large


firms that can affect the market price
Imperfect competition arises when economic agents are price-
makers, not price-takers. They decide on the price of their product,
whereas perfect competitors take their price as given. We need to
study this because this is the how the world we live in works (sad).

1
Imperfect competition are market failure arising when
economic agents are price-makers not price-takers

Imperfect competition
Prevails in an industry whenever individual sellers can affect the
price of their output. The major kinds of imperfect competition are:
monopoly (single producer; product without close substitutes);
oligopoly (few producers; little to no difference in products); and
monopolistic competition (many producers; many real or
perceived differences in product).

Imperfect competitor has a finite elasticity of demand


P P

d
Q Q

Perfect competition Imperfectcompetition


The perfectly competitive firm can sell all it wants without depressing
the market price, but the imperfect competitor will find that its demand
curve slopes downward as higher price drives sales down.

2
Most cases of imperfect competition can be traced to
two principal concepts:

Economies of scale Cost of doing business


Industries tend to have fewer sellers There are barriers to entry that
when there are significant economies make it difficult for new players to
of large-scale output and decreasing enter an industry. e.g. government
costs. Large firms can produce more regulation limiting number of
cheaply by expanding production, competitors, expensive capital costs
have cost advantage, and undersell to set-up business, etc.
small firms, which cannot survive.

Monopoly is a polar case of imperfect competition


Monopolies are characterized by a lack of competition within the
market. Single ownership over a resource gives monopolist the
power to raise the market price of a good over marginal cost
without losing customers to competitors. This cannot be done under
perfect competition assumptions.

3
Consider a monopolist
Quantity (Q) 0 1 2 3 4 5 6
Total cost (TC) 145 175 200 220 250 300 370
Marginal cost
(MC) 30 25 20 30 50 70
Price (P) 200 180 160 140 120 100 80
Total revenue
(TR) 0 180 320 420 480 500 480
Marginal
revenue (MR) 180 140 100 60 20 -20
Profit (π) -145 5 120 200 230 200 110

Monopolist can charge higher


Price
MC
prices and so P is no longer
constant, and MR lies below
ATC demand curve. Just like the
EM
case of a perfect competitor, a
P*M monopolist’s profit-maximizing
condition is still MC=MR, but
monopolist charges a higher
price than would prevail under
perfect competition.

MR D Q
QM*
Cost Revenue

4
P P

MC MC

ATC EM ATC
P*M
EPC
P*PC d = MR = P

MR D
Q Q
QPC* QM*

Perfect competition monopolist


Cost Revenue

Oligopoly and monopolistic competition are diluted


forms of monopoly
In a purely competitive environment, firms act noncooperatively,
acting on their own without any agreements with other firms. Firms
operate in a cooperative mode to minimize competition. When
firms in an oligopoly actively cooperate with each other, they
engage in collusion. By behaving like monopolists, these firms will
still maximize profits, but are economical efficient.

READING ASSIGNMENT: Oligopoly and Monopolistic Competition [SN], pages


189-191.

5
Imperfect competition is profit maximizing but is not
economically efficient

Profit COST WELFARE


Maximizing MINIMIZING MAXIMIZING
MC = MR MC = AC MC = P
Producing output with highest Productive efficiency is when Allocative efficiency is when
revenue and minimum cost. cost is minimized since average price reflects the marginal cost of
cost is minimum. production, and thus, pareto
optimality conditions are met.

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