Unit 4 - Imperfect Competition Guide

[[4.1 - Introduction to Imperfectly Competitive Markets[[

• Firms are able to make an increased profit in the long run if there is less competition since firms are considered to be price makers. There are stricter @@barriers to entry@@ in imperfect competition (Governmental, economies of scale, geography, and so on)
    * Common barriers to entry: control of scarce resources, legal barriers, high startup costs

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[[4.2 - Monopolies[[

• @@Monopoly@@: market structure where there is only one firm producing a product
    * Only producer of a good, has no close substitutes
    * On the graph, there is a downward sloping demand curve

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• Quantity is produced : at MR = MC
    * Price is : MR=MC, up to demand
• Supply curve : where MC > AVC
    * Allocatively efficient due to them producing at MR=MC
    * Productively inefficient because they don’t produce at the minimum of the ATC

• Natural monopoly: has large fixed costs, and long economies of scale, has downward sloping ATC curve
• Natural monopoly production point : MR=MC
• Government will correct by forcing them to set price : at ATC=D

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[[4.3 - Price Discrimination[[

• Price discrimination occurs in specific industries as consumers pay a different price for the same good.
    * To be able to price discriminate, you need market power
• Imperfect price discrimination : charging consumers different prices based on the buyer’s willingness to pay
• Perfect price discrimination : charges all consumers the maximum they are willing to pay, no deadweight loss, produce at P=MC
    * Example : resellers, coupons, bulk buying (costco), etc.

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• In price discrimination, there is no deadweight loss and no consumer surplus as well, only producer surplus.

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[[4.4 - Monopolistic Competition[[

• @@Monopolistic competition:@@ is another term for imperfect competition, and occurs when many companies offer competing products which are similar but not perfect substitutes.
    * Characteristics:
      * Combines features of both a monopoly and perfect competition
      * Many sellers and differentiated products
      * Will use advertising to make demand more inelastic + differentiate product
      * Makes profit in short run, normal profit in long run
      * Allocatively inefficient (P does not equal MC)
      * Productively inefficient (does not produce @ minimum of ATC, until long run)
      * Downwards sloping demand curve
      * Produce at MR = MC, price is MR = MC up to demand

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  * @@Long Run@@
    * Normal profit in long run
    * Short run profits will attract new firms to join, which decreases the demand until the demand Curve is tangent to ATC, causing normal profits in long run
    * In long run, they produce in region where economies of scales exist, because they produce in declining portion of ATC

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[[4.5 - Oligopoly and Game theory[[

• @@Oligopoly Characteristics@@
    * Small number of firms, standard or differentiated product
    * Interdependent : all the actions that a firm takes will affect the other firms in the oligopoly (if They ask why the market is an oligopoly, say it’s because they’re interdependent)
    * Cartels : a group that agrees to control the price and output of a product (often form in oligopoly)
    * Collusion : working together to maximize profit
    * Graph is almost identical to monopoly (you will never be asked to draw them)
      * Also produce same quantity and price of monopoly

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• @@Game Theory@@
    * Payoff matrix : represents the payoff to each player to show combinations of given strategies
      * Dominant strategy : the strategy that has a better payoff regardless of what strategy the opponent chooses
      * Nash equilibrium : point where both players can do no better than the other given the choice of their opponent

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