Unit 4 - Imperfect Competition Guide
4.1 - Introduction to Imperfectly Competitive Markets
Firms can make increased profits in the long run if there is less competition; firms are price makers.
Common barriers to entry include government regulations, economies of scale, and high startup costs.
4.2 - Monopolies
Monopoly: Market structure with only one firm producing a product; has no close substitutes.
Quantity produced: at MR = MC; Price set at MR=MC, up to demand.
Allocatively efficient but productively inefficient due to not producing at minimum of ATC.
Natural monopoly: Large fixed costs, downward sloping ATC curve; government sets price at ATC=D.
4.3 - Price Discrimination
Price discrimination: Consumers pay different prices for the same good; requires market power.
Imperfect price discrimination: Prices based on buyer’s willingness to pay.
Perfect price discrimination: Charges maximum willingness to pay; no deadweight loss, produces at P=MC.
4.4 - Monopolistic Competition
Monopolistic competition: Many firms offer similar but differentiated products.
Characteristics: many sellers, advertising, normal profit in long run, allocatively inefficient, and productively inefficient.
Downward sloping demand curve, produce at MR = MC.
4.5 - Oligopoly and Game Theory
Oligopoly: Small number of firms, interdependent.
Cartels and Collusion: Firms cooperate to control price and output.
Game Theory: Payoff matrix indicates player strategies; dominant strategy is best regardless of opponent's choice; Nash equilibrium is stable strategy point where no player gains by changing strategy.