Micro Unit 4 - Imperfect Competition
Introduction to imperfectly competitive markets
Characteristics of Imperfectly competitive firms
Number of competitors
Types of products
Price control
Barriers to entry
Long run profit
Market structure characteristics
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Many competitors
Identical (standardized) types of products
No barriers to entry
No price control
0 long run profit
Many competitors (4 largest firms < 40% of market share
Differentiated types of products
No barriers to entry
Limited price control
0 long run profit
Few competitors (4 largest firms > 40% of market share
Identical or Differentiated types of products
Yes barriers to entry
Significant price control
Positive long run profit is possible
1 competitor involved
N/A types of products
Yes barriers to entry
100% price control
Positive long run profit is possible
Price control or "price makers"
All imperfectly competitive firms exert some level of control over price
The ability to determine their price comes from either the type of product they sell or the amount of competition
Price making firms face a downward sloping demand curve
Efficiency defined
P = MC: Allocative efficiency
Price of a good should equal the value of the land labor and capital used to produce it
P = min ATC: Productive efficiency
The least costly production techniques are used
Imperfect Competition is inefficient
Barriers to entry means competition is inherently limited
Price control means firms determine their own price
Unlike perfectly competitive firms, there's no cause for price to decrease and meet the two efficiency tests
Monopoly
Monopoly Lessons:
In a monopoly there is only one firm in the market
Market demand is monopoly firm demand
Monopolies have market power and can choose their price
What happens in a monopoly
Many buyers but ONE seller (blocked entry)
Unique product (no close substitutes)
Price maker (market power)
With a perfectly elastic demand curve MR = D
With a downward sloping demand curve MR < D
Implications of D > MR
Still profit maximize at Q where MR = MC
Charge P from Demand curve
If MR is positive, TR is increasing and the D curve is elastic at that quantity
If MR is positive, TR is increasing and the D curve is elastic at that quantity
If MR is negative, TR is decreasing and the D curve is inelastic at that quantity
Monopoly Lessons:
Monopolies are inefficient compared to perfect competition
The monopoly model is a helpful way to evaluate market situations
Price Discrimination
Price discrimination lessons
Firms price discriminate in order to increase profits
Firms have to be able to efficiently segment the market by elasticity in order to price discriminate
Price discrimination can increase overall output
You don't have to be a monopoly to price discriminate, but you must have market power
Conditions for price discrimination
The firm must be a price maker - have market power - in order to price discriminate
The firm must be able to effectively separate customers by their price elasticity
The firm must be able to prevent resale of its product - competition - in order to price discriminate
The difference in price is not based on differences in the cost of production
Perfect Price Discrimination Lessons
With perfect price discrimination there is a downward sloping market demand curve, but P = MR
Firms charge each customer the maximum they are willing and able to pay
This monopoly is allocatively efficient
Monopolistic competition
Lessons
This market structure has aspects of both monopoly and perfect competition
A key feature of monopolistically competitive firms is product differentiation
A key weakness of monopolistically competitive firms is excess capacity
Monopolistic competition model lessons
A monopolistically competitive market graph can indicate positive, zero, or negative economic profits. It can also indicate the firm should shutdown
A monopolistically competitive firm which is producing will have surplus, deadweight loss, and excess capacity
Excess capacity is the "price" of differentiation
Monopolistic competition in the long run
Monopolistically competitive firms will earn zero economic profit in the long run
This occurs because there are low barriers to entry in this market