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

[[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

• 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

  

[[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.

    

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

[[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

    

  • @@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

    

[[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

• @@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