Module 10.1 Imperfect Competition Lecture

Perfect Competition and Market Structures

• Overview of Market Structures

  • Important to understand different types of competition in markets.

  • Assumptions of perfect competition are often unrealistic; therefore, it's essential to examine less ideal scenarios.

• Perfect Competition

  • Defined by:

  • Many competitors.

  • Identical (homogeneous) products.

  • No barriers to entry for new firms.

  • Rarely seen in the real world.

• Monopoly

  • The extreme opposite of perfect competition, characterized by:

  • Only one company dominating the market.

  • Unique product offering with no direct substitutes.

  • High barriers to entry, making it difficult for new companies to enter.

  • True monopolies are also uncommon.

• Monopolistic Competition

  • A market structure that lies between perfect competition and monopoly.

  • Features include:

  • Many competitors with a wide range of product choices.

  • Low or no barriers to entry, allowing new firms to start easily.

  • Example: The restaurant industry, where many options exist (fast food, fine dining) and new restaurants can be opened with relative ease.

• Oligopoly

  • A market with few competitors and some barriers to entry.

  • Key characteristics:

  • Limited number of firms dominate the market.

  • Products may be differentiated (e.g., smartphones), appealing to different consumer needs, or homogeneous (e.g., cell phone services).

  • Example: The smartphone market with large companies offering similar yet distinct products; cell phone service companies tend to offer very similar products.

• Degrees of Market Power

  • Moving away from perfect competition leads to varying degrees of market power:

  • Price Takers vs. Price Makers:

    • In perfect competition, firms are price takers.

    • In imperfect markets (e.g., monopolistic competition, oligopoly), firms can be price makers due to market power.

  • Determining Factors:

    • Number of competitors in the market.

    • Level of product differentiation.

    • Barriers to entry for new firms.

• Government Intervention and Barriers

  • Government can grant firms exclusive rights (e.g., patents) affecting competition.

  • Example: Pharmaceutical companies often operate under patents, which creates barriers for competitors.

  • Licensing:

  • It can lead to established companies keeping newcomers out of the market.

  • Heavy regulations may prevent the establishment of new businesses.

• Natural Monopolies

  • Certain industries might naturally lead to one provider due to significant cost efficiencies.

  • Example: Electricity providers in a town; high costs of multiple power plants mean single provision is more efficient.

  • Particularly in markets where products have network effects, the value increases as more people use the service.

  • Example: A word processing system becomes more valuable as more users adopt it.

• Illustrative Example of a Scarce Resource

  • Hypothetical mineral called "vibranium" with a monopoly due to unique geographic location controlled by one firm.

  • The scarcity increases the product's value.

These concepts underline the importance of understanding the spectrum of market structures and their implications on competition, pricing power, and market entry.