R

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