Imperfect Competition

Imperfect-Features/Assumptions of imperfect competition

Many sellers, many buyers, product differnciation, freedom of entry and exit, reasonable knowledge of profit and costs, firms are profit maximisers

Imperfect-Sucsessful product differnciation leads to

More inelastic demand

How do firms achieve product differenciation

1. Branding: Establishing different and distinctive brand names for the products E.g Apple iPhone

2. Marketing Differentiation / Competitive Advertising: Firms try to distinguish their product through distinctive packaging and other promotional techniques E.g Breakfast cereals

3. Physical Product Differentiation: Firms use size, design, colour shape, performance and features to differentiate their products.

Imperfect SPECS

SNP: This firm is earning normal profits because AR = AC. The firm cannot earn SNP in the Long Run as Freedom of Entry exists which competes the SNP away.

Price / Output: The firm produces output Q1 and sells it for price P1

Equilibrium: Occurs at point X where MC = MR and MC is rising faster ager that point and cuts MR from below.

Costs: The average cost of production is shown at the cost B

Scarce Resources: The firm is not producing at the lowest point of the AC, this indicates that firm is wasting scarce resources.

Advantages of Imperfect

1. Profit >>>>>> In the long run consumer are not being exploited as firms are only earning normal profits (AC=AR)

• 2. Information >>>>>>> due to competitive advertising, consumers have more info available to them

• 3. Innovation>>>>> Firms can benefit from gaining a competitive edge over their rivals……motivation to innovate= better/improved products

• 4. Choice and variety >>>>>> goods are not homogeneous, they are close substitutes (similar but not identical) – more choice

• 5. Competition >>>>>> with few barriers to entry , markets are relatively competitive resulting in lower prices

Disadvantages of Imperfect

1. Inefficient: firms don’t operate at the lowest point on the AC curve. This is accounted for by the cost of advertising and differentiation which increase the cost of production. These costs will end up getting passed onto consumer through higher prices

2. Excess capacity: production is not at the min point if AC and this is considered to be wasteful of scarce resources. The firm could produce a greater output at a lower unit cost. It has excess capacity and resources are wasted

3.Price is greater than MC: the price charged by a firm in IC will exceed MC. Iin perfect comp: P=MC

Product Differentiation

means that the products sold by competing firms are similar but have differences. There are close (but not perfect) substitutes available.

Explain the demand curve

- Each firm sells a differentiated product (there are close but not perfect substitutes available). This establishes brand loyalty and customers view the products of rival firms as somewhat distinct.

- If a firm reduced product price, there will be an increase in demand as consumers of substitutes switch to this firms good which has become relatively cheaper

- If a firm increases its price, there will be a decrease in sales as consumers will switch to rival firms’ goods which (close substitutes) as these goods are now relatively cheaper.