Microeconomics-Imperfect Competition

Imperfectly competitive markets

markets with only one or a few suppliers

Firms in imperfectly competitive markets

can’t assume that the quantity they supply does not affect price, faces a downward sloping demand curve (if supply increases, price goes down)

Market power

ability to choose market prices, possessed by firms facing a downward sloping demand curve

Monopoly

when a market has one supplier, arises due to barriers to entry

Barriers to entry

ownership of a key resource, government created monopolies, natural monopolies

Government created monopolies

when the government gives the rights to supply a product to a single company; ex. patent, copyright law

Natural monopolies

when a single firm can supply the market at a lower cost than could two or more firms; happens when there are large fixed costs that cause the average costs to fall as production increases

Impact of monopolies on social welfare

transfers consumer surplus to the monopoly (consumers could have paid less than monopoly price in a competitive market), reduction in social well-being (restriction of supply)

Profit maximization

increase supply until marginal cost equals marginal revenue

Sherman Anti-Trust Act

1890 law used to increase market competition; large mergers and acquisitions must be reviewed by government regulators

Price discrimination

charging different prices to different customers, makes the marginal revenue curve closer to the market demand curve, moves market closer to socially efficient quantity

Oligopoly

market with only a few sellers

Oligopolies vs. monopolies

oligopolies must also consider the choices other suppliers make

Cartel

suppliers in an oligopoly agree to cooperate and behave like a monopolist to maximize profits, illegal under US anti-trust law

Problems faced by cartels

marginal revenue will be greater than marginal cost for each firm, creating temptation to increase production, which lowers market price and negatively impacts other members of cartel

Organization of Petroleum Exporting Companies (OPEC)

caused oil prices to increase sharply during the COVID-19 pandemic by reducing oil output

Monopolistic competition

markets in which firms produce similar but differentiated products; ex. books, restaurants, clothes

Firms in monopolistically competitive markets

faces a downward sloping demand curve, chooses output the same way a monopoly does

Entry and exit in monopolistically competitive markets

entry will continue until economic profits reach zero because there are no barriers to entry

Welfare properties of monopolistically competitive markets

there is some social inefficiency because price exceeds marginal costs, consumers benefit from the increased range of choices