4.1: Imperfect Competition

Barriers To Entry

• An Imperfectly Competitive Market Exists Because Of High Barriers To Keep Other Firms From Entering

Types Of Barriers To Entry

1. High Fixed/start-up Costs

   1. Eg. There Is Only One Electric Company Because They Are The Only Ones That Can Make Electricity At The Lowest Cost → Natural Monopoly

2. Geography Or Ownership Of Raw Materials

3. Legal Barriers

   1. The Government Issues Patents To Protect Inventors And Forbids Others From Using Their Invention

Monopolies

Market Shares

• A Monopoly May Have Competitors, But Determining Monopolies Comes Down To Market Share

  • Market Share: The Proportion Of Total Sales That Are Done By One Firm

Can Monopolies Be Good For The Economy?

• Yes, Eg. Electric Company → We Get The Best Deal By Allowing One Company To Be In Charge Of That Type Of Yield

  • economies Of Scale Make It Impractical To Have Smaller Firms

• Natural Monopoly: It Is Natural For Only One Firm To Produce Because They Can Produce At The Lowest Cost

Monopolies

• Inefficient Because They:

  1. Charge Higher Prices

  2. Don’t Produce Enough (not Allocatively Efficient)

  3. Produce At Higher Costs (not Productively Efficient)

Monopolistic Competition

Monopolistic Qualities

• Control Over Price Of Own Good Due To Differentiated Product

• D > MR

• Plenty Of Advertising

• Inefficient

Perfect Competition Qualities

• Large Number Of Smaller Firms

• Relatively Easy Entry And Exit

• Zero Economic Profit In Long-run Since Firms Can Enter

Differentiated Products

• Goods Are Not Identical

• Firms Seek To Capture A Piece Of The Market By Making Unique Goods

• Since These Products Have Substitutes, Firms Use Non-price Competition

  • Eg. Brand Names, Packaging, Product Attributes, Service, Location, Advertising

  • Two Goals Of Advertising:

    1. Increase Demand

    2. Make Demand More Inelastic

• When Short-run Profits Are Made

  • New Firms Enter, New Firms = More Close Substitutes And Less Market Shares For Each Existing Firm

  • Demand For Each Firm Falls

• When Short-run Losses Are Made

  • Firms Exit The Marked, Less Substitutes And More Market Shares Exist For Remaining Firms

  • Demand For Each Firm Rises