Chapter 8: Imperfect Competition

8.1 Monopoly

Monopoly: only provider of a good

• Caused by:
  • Patents
  • Control of resources
  • Economies of scale/other cost advantages
  • Exclusive licenses
  • Network externalities
  • Ex) Social media networks becoming valuable as people switch sites

8.2 Price Discrimination

Price discrimination: when seller can provide same good to different buys at different prices

• Firm must have market power
• Buyers with differing demand elasticities must be separable
• Must be able to prevent reselling

Perfect price discrimination: when seller can charge each buyer the most they’re willing to pay for a good

8.3 Monopolistic Competition

• Bilateral monopoly: when the market only has one buyer and one seller

8.4 Oligopoly and Game Theory

• Oligopoly: where a few firms sell a standardized or differentiated product
• Market power: ability of individual firm to influence price
• Strategic decision-making: individual must make choice but consequences depend on factors that are unknown to the individual
• Game theory: considers strategic decisions individuals in a game or market place will need to make to anticipate what a rival would do
• Prisoner’s dilemma: situation where distrust leads two individuals to chose a less than optimal result

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