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

	Perfect Competition	Monopolistic Competition	Monopoly	Oligopoly
# of firms	Many	Many	1	Few
Type of product	Standard	Differentiated	Unique	Standard or different
Price control	None	Little	Yes	Some
Barriers to entry	None	None (few)	High	High

[[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

Fig. 1 Monopoly

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

Fig. 2 Natural Monopoly

[[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.

Fig. 3 Price Discrimination

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

\ Fig. 4 Monopolistic Competition in Short Run

\ * @@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

Fig. 5 Monopolistic Competition in Long Run

[[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