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Chapter 9: Imperfect Competition and Monopoly

Perfect Competition

Idealized market of atomistic firms who are price-takers

Major kinds of imperfect competition

Monopoly

Oligopoly

Monopolistic competition

*Prices are higher and outputs are lower under imperfectcompetition

Imperfect Competition

Prevails in an industry whenever individual sellers have some

measure of control over the price of their output

If a firm can appreciably affect the market price of its output

*Imperfect competitor has some but not complete discretionover its prices

Under Perfect Competition

horizontal demand curve

o indicating it can sell all it wants at going market price

demand is perfectly elastic

Under Imperfect Competition

downward-sloping demand curve

o if a firm increases its sales, it will definitely depress the

market price of its output as it moves down its dd demand

curve.

emand is finite elasticity

MONOPOLY

! single seller with complete control over an industry

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It is the only firm producing in its industry and there is no

industry producing a close substitute

Most monopolies persist because of some form of government

regulation or protection

*In the long run, no monopoly is completely secure from attackby competitor

OLIGOPOLY

o "ach individual firm can affect the market price.

o #few sellers$% price wars

MONOPOLI!IC COMP"!I!ION

&hen a large number of sellers produce differentiated products.

Products sold by different firms are not identical

Differentiated products ones whose important characteristicsvary.

#hole price of a $ood

Includes not 'ust its dollar price but also the opportunity cost of

search, travel time and other non-dollar cost.

See page 169

OU%C" O& M'%("! IMP"%&"C!ION

Industries tend to have fewer sellers when there are significant

economies of large-scale production and decreasing cost

Markets tend toward imperfect competition when there are

#barriers to entry$ that make it difficult for new competitors toenter an industry

o (arriers may arise from government laws and regulations

o "conomic factors

If there are economies of scale, a firm can decrease itsaverage costs by expanding its output, at least up to a pointThat means bigger firms will have cost advantage over smaller

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firms.

See page 171

Nat)ral Monopoly

! market in which the industry)s output can be efficientlyproduced only by a single firm.

*his occurs when the technology e+hibits economies of sale over

a range of output that is as large as the entire demand

#network industries$

*'%%I"% !O "N!%Y

egal estrictions

o Patents, entry restrictions and foreign-trade tariffs and

uotas.

/igh 0ost of "ntry

!dvertising and Product ifferentiation

!otal %e+en)e , P - .

'+era$e %e+en)e , price per )nit / !%01

Mar$inal %e+en)e

Is the change in revenue that is generated by an additional unit

of sales. 0an either be positive or negative.

0alculated by subtracting the total revenues of ad'acent outputs

1egative M means that in order to sell additional units, the firm

must decrease its price on earlier units so much that its totalrevenues decline.

ote! "ven though #$ is negative, %verage $evenue or Price isstill Positive.

P 2 '% 2 M% , P 3 Lost re+en)e on all pre+io)s 1

#arginal $evenue is positive when demand is elastic, &erowhen demand is unit'elastic, and negative when demand is

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inelastic.

Demand is elastic when a price decrease leads to a revenueincrease

!O!'L P%O&I! , !O!'L %"4"NU" 3 !O!'L CO! , 5P - 16 3 !C

#aximum Profit will occur when output is at that level wherethe firm(s marginal revenue is e)ual to its marginal cost.+hen #$ #-

Perfect Competition

2. *he sale of e+tra units will never depress price and the lostrevenue on all previous is therefore eual to zero.

a. Price 3 !verage evenue 3 Marginal evenue

4. M 3 P 3 M0 at the ma+imum-profit level of output

Mar$inal Principle

People will ma+imize their incomes or profits or satisfactions bycounting only the marginal costs and marginal benefits of a decision.

$ead ummary