Perfect Competition, Monopoly, Oligopoly

and Monopolistic Competition in Seller

MarkersAllan Fels, Professor of Government

The Australia and New Zealand School of Government (ANZSOG)

1) PERFECT COMPETITION

CharacteristicsMany buyers and sellers, with no dominant

firmHomogenous product Free entry and exit (usually)

ExamplesWheatMilk

1) PERFECT COMPETITION Behaviour and Pricing

Firms are price takers

Continual pressure to satisfy customer demand, minimise cost, innovate in order to survive

Collusion Difficult:

Too many competitors to organise

If prices rise, there will be entry by competitors

Government induced collusion. The government may run the market as a cartel by

a) setting a minimum price;

b) restricting entry

Examples Taxis Doctors

2) MONOPOLY Characteristics

Sole seller No close product substitutes

Causes of monopoly Entry barriers

Source of entry barriers Monopoly of resources Government regulation Production process (natural monopoly)

Examples Networks? E.g. telco, energy Innovators?

Behaviour and prices Assume profit maximisation occurs? Or less pressure to operate

efficiently

Monopoly can determine its own price but in raising price it is at the expense of quantity

The concept of marginal revenue i.e. the addition to revenue from producing and selling one more unit

Monopoly produces up to the point where marginal cost equals marginal revenue

Profits tend to be “above normal” but accounting results can be a poor indicator of monopoly profits

Price discrimination requires Monopoly

Different elasticities

Ability to separate the market

2) MONOPOLY

3) OLIGOPOLYCharacteristics

Few sellers Interdependent

Pricing and behaviour Note the relevance of game theory

Prisoners’ dilemma Cooperation vs conflict

Cournot Adjust price

Bertrand Adjust quantity

Examples Banks, oil companies, cement

4) MONOPOLISTIC COMPETITION

CharacteristicsMany sellersProduct differentiationFree entry

ExamplesBooks, CDs, films, computer games,

restaurants, piano lessons, furniture etc

BehaviourFree entry tends to prevent “excessive” profits

5) INDICATORS OF COMPETITION

Imports

Substitutes

Entry

Countervailing power

Other factors eg. dynamic factors such as technology

Vertical integration?

6) PUBLIC POLICIESMonopoly

1. Introduce more competition2. Regulate behaviour3. Public ownership4. Competition for the market as opposed to

competition in the market5. Take no action

Collusion Cartel laws Price regulation Structural remedies