Imperfect competition is an economic concept used to describe marketplace conditions that render a market less than perfectly competitive, creating market inefficiencies that result in losses of economic value. In the real world, markets are nearly always in a condition of imperfect competition to some extent. However, the term is typically only used to describe markets where the level of competition among sellers is substantially below ideal conditions.A situation of imperfect competition exists whenever one of the fundamental characteristics of perfect competition is missing. When there is perfect competition in a market, prices are controlled primarily by the ordinary economic factors of supply and demand. Notably, the stock market may be viewed as a continually imperfect market because not all investors have ready access to the same level of information regarding potential investments. Imperfect competition commonly exists when a market structure is in the form of monopolies, duopolies, oligopolies, or monopsony (very rare) Market structures that effectively render competition imperfect are most often characterized by a lack of competitive suppliers. Imperfect competition often exists as a result of extremely high barriers to entry for new suppliers. For example, the airline industry has high barriers to entry due to the extremely high cost of aircraft. The most extreme condition of imperfect competition exists when the market for a particular good or service is a monopoly, one in which there is a sole supplier. A supplier that has a monopoly on the provision of a good or service essentially has complete control over prices. Because it has no competition from other suppliers, the sole supplier can essentially set the price of its goods or services at any level it desires. Monopolies often charge prices that provide them with significantly higher profit margins than most companies operate with. A duopoly is a market structure in which there are only two suppliers. Although duopolies are somewhat more competitive than monopolies, the level of competition is still far from perfect, as the two suppliers still have significant control of marketplace prices. An example of a duopoly exists in the United Kingdom’s detergent market, where Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) are virtually the only suppliers. The two suppliers in a duopoly often collude in price setting. Oligopolies are much more common than either monopolies or duopolies. In an oligopoly, there are several – but a small, limited number – of suppliers. The market for cell phone service in the United States is an example of an oligopoly, as it is essentially controlled by just a handful of suppliers. The small number of suppliers, which limits buying choices for consumers, provides the suppliers with substantial, although not complete, control over pricing. A rare form of imperfect competition is monopsony. A monopsony is a single buyer, rather than any supplier.

1. Imperfect competition –
Monopoly, Oligopoly and
Monopolistic Competition
Dr. Rashmi Ahuja

2. Imperfect Competition
• Imperfectly competitive firms
• Have some control over price.
• Price may be greater than the cost of production.
• Long-run economic profits are possible.
• Face a downward-sloping demand curve.
• Contribute to loss of efficiency.
• Are very common in every economy.

3. Different forms of imperfect competition
•Monopoly (most inefficient)
•Oligopoly (more efficient than a monopoly)
•Monopolistic competition (closest to perfect competition)

4. • With perfect competition
• If the firm raises its price, sales will be zero.
• If the firm lowers its price, sales will not increase.
• The firm’s demand curve is the horizontal line at the market price.
• With imperfect competition
• The firm has some control over price or some market power.
• The firm faces a downward-sloping demand curve.
• In the case of a monopoly, the firm’s demand curve is the market demand
curve.

5. The demand curves facing perfectly and
imperfectly competitive firms
Quantity
$/unit
of
output
D
Market
price
Price
Quantity
D
Perfectly competitive firm Imperfectly competitive firm

6. What is Monopoly?
Monopoly is a market situation in which there is only one producer of a
commodity with no close substitutes.

7. Monopolies pose a dilemma for the
government……..
• Should the government allow monopolies to exist?
• Are there circumstances in which the government should actually
promote the existence of monopolies?
• Should the government regulate the prices monopolies charge?
• Will such price regulation increase economic efficiency?

8. Monopoly environment
• Single firm serves the “relevant market.”[Local Monopolies]
• The demand for the firm’s product is the market demand curve.
• No close substitutes
• Firm has control over price. [Price Maker]
• But the price charged affects the quantity demanded of the monopolist’s
product.
• Price Discrimination

9. • The firm’s demand curve is identical to the market demand curve for
the product.
• A monopolist can sell additional output only if it reduces prices.
• The MR curve lies below the demand curve at every point but the
first.
Monopoly = Industry

11.  Monopolies emerge due to a lack of competition
created by barriers to entry.
 Barriers to entry have three sources: –
 Ownership of a key resource.
 The government gives a single firm the exclusive right to
produce some good.
 Costs of production make a single producer more efficient
than a large number of producers. [Economies of scale]
Where do monopolies come from?

12. Monopoly Resources
• Although exclusive ownership of a key resource is a potential source of monopoly, in
practice monopolies rarely arise for this reason.
• This happens infrequently because most resources are widely available from a
variety of suppliers.
Examples ????
Few prominent examples of monopolies based on control of a key resource, such as
the Aluminum Company of America (Alcoa) and the International Nickel Company of
Canada.

13. Are Diamond (Profits) Forever? The De Beers Diamond Monopoly
De Beers promoted the sentimental
value of diamonds as a way to maintain
its position in the diamond market.

14. Government created monopolies
• Governments may restrict entry by giving a single firm the exclusive
right to sell a particular good in certain markets.
1. Patent and copyright laws are two important examples of how
government creates a monopoly to serve the public interest.
Eg ?????
2. Public Franchises
Eg. ??????

15. A situation in which economies of scale are so large that one
firm can supply the entire market at a lower average total cost
than can two or more firms.
Natural monopoly

16. Price and
cost
Quantity
Demand
0
0.06
0.04
30 billion
ATC
15 billion
Average total cost for a natural monopoly
B
A

17. Monopoly vs. Competition: Demand Curves
In a competitive market, the market
demand curve slopes downward.
But the demand curve
for any individual firm’s product is
horizontal at the market price.
The firm can increase Q without
lowering P,
so MR = P for the competitive firm.
D
P
Q
A competitive firm’s
demand curve

18. Monopoly vs. Competition: Demand Curves
A monopolist is the only
seller, so it faces the market
demand curve.
To sell a larger Q,
the firm must reduce P.
Thus, MR ≠ P.
D
P
Q
A monopolist’s
demand curve

19. Q P TR AR MR
0 $4.50
1 4.00
2 3.50
3 3.00
4 2.50
5 2.00
6 1.50
n.a.
Common Grounds
is the only seller of
cappuccinos in town.
The table shows the
market demand for
cappuccinos.
Fill in the missing
spaces of the table.
What is the relation
between P and AR?
Between P and MR?
Example

20. Answers
Here, P = AR,
same as for a
competitive firm.
Here, MR < P,
whereas MR = P
for a competitive
firm.
1.50
6
2.00
5
2.50
4
3.00
3
3.50
2
1.50
2.00
2.50
3.00
3.50
$4.00
4.00
1
n.a.
9
10
10
9
7
4
$ 0
$4.50
0
MR
AR
TR
P
Q
–1
0
1
2
3
$4

21. Common Grounds’ D and MR Curves
-3
-2
-1
0
1
2
3
4
5
0 1 2 3 4 5 6 7 Q
P, MR
MR
$
Demand curve (P)
1.50
6
2.00
5
2.50
4
3.00
3
3.50
2
4.00
1
$4.50
0
MR
P
Q
–1
0
1
2
3
$4

22. Formula:
Monopolist’s Marginal Revenue.
The marginal revenue of a monopolist is given by the formula
MR = P (1 + E)/E
where E is the elasticity of demand for the monopolist’s product and P is the price charged for the
product.

23. Lerner’s Index - degree of market power
L = (P-MC)/P = - 1/ e

24. • Show that if demand is elastic (say, E = −2), marginal revenue is positive
but less than price. Show that if demand is unitary elastic (E = −1),
marginal revenue is zero. Finally, show that if demand is inelastic (say, E =
−0.5), marginal revenue is negative.

25. Determination of price and equilibrium under monopoly
• Like every other firm, a monopoly maximises profit at the output when marginal
revenue equals marginal cost (MR=MC).
According to the rule, a monopolist maximizes profit at the rate of output where MR = MC.
Total profit = profit per unit times quantity
Total profit = (p – ATC) x q

26. Price and
revenue
Quantity
Demand =
average
revenue
Marginal
revenue
0
To sell more, the price
must be lowered. The
marginal revenue curve
will be below the
demand curve.

27. Profit-maximising quantity and price for
a monopolist: Figure 8.3a
Price and
cost
Quantity
Demand
MR
0
MC
$60
42
6
27
Profit-maximising
quantity
Profit-
maximising
price B
A

28. Profits for a monopolist
Price and
cost
Quantity
Demand
MR
0
MC
$60
42
6
30
Profit-maximising
quantity
Profit-
maximising
price B
A
ATC
Profit

29. Monopoly vs competitive outcomes
• A monopolist produces less and charges a higher price than would a
competitive industry.
• Therefore, monopolist is less efficient than perfect competition.

31.  Increasing competition with antitrust laws
 Ban some anticompetitive practices, allow govt to break up
monopolies.
 Regulation
 Govt agencies set the monopolist’s price.
 The question is what the set price should be equal to?
 Common options are:
 Price = Marginal cost
 Price = Average total cost.
Government policy toward monopoly

32. Regulating a natural monopoly: Figure 8.7
Price and
cost
Quantity
Demand
MR
0
MC
PM
PR
QR
PE
Monopoly
price
Regulated
price
Efficient
price
ATC
QE
QM
Profit
Loss

33. Price Discrimination
•PRICE DISCRIMINATION is the act of charging different
prices to different consumers in order to capture
consumer surplus.
•Three basic types of price discrimination exist:
First Degree
Second Degree
Third Degree

34. Conditions necessary to price discriminate
1) Firm must possess some degree of market power
2) A cost-effective means of preventing resale between lower- and
higher-price buyers (consumer arbitrage) must be implemented
3) Price elasticities must differ between individual buyers or groups of
buyers

35. First-Degree (Perfect) Price Discrimination
• Every unit is sold for the maximum price each consumer is willing
to pay
• Allows the firm to capture entire consumer surplus
• Difficulties
• Requires precise knowledge about every buyer’s demand for the good
• Seller must negotiate a different price for every unit sold to every buyer

36. Second-Degree Price Discrimination
• When a company charges a different price for different quantities
consumed.
• Lower prices are offered for larger quantities and buyers can self-select the
price by choosing how much to buy
Eg. Block-pricing schedules - charge one price for the first few units (a block)
of usage and a different price for subsequent blocks.

37. Third degree Price discrimination
• Third-degree price discrimination occurs when a company charges a
different price to different consumer groups.
• Consumers differs by some observable characteristics.
• For example, movie goers may be subdivided into seniors, adults and
children, each paying a different price when seeing the same movie at
one theater.
• Pricing Rule: -
Consumers with low elasticities - Higher or lower price ????

38. Calculate the profit maximising qty and price for this
monopolist….
(1) Q = 100 - p; (demand curve for firm output)
(2) C(Q) = 1,000 + 20Q; (cost curve)

39. Q1. Refer to the figure below. Which area shows the reduction in
consumer surplus from the existence of monopoly?
a. Area A.
b. Area B + C.
c. Area A + B.
d. None of the areas
indicated on the graph.
Check Your Knowledge

40. Q1. Refer to the figure below. Which area shows the
reduction in consumer surplus from the existence of
monopoly?
a. Area A.
b. Area B + C.
c. Area A + B.
d. None of the areas
indicated on the graph.
Check Your Knowledge

41. Q2. In which of the following situations can a firm be
considered a monopoly?
a. When a firm is surrounded by other firms that produce close
substitutes.
b. When a firm can ignore the actions of all other firms.
c. When a firm uses other firms’ prices in order to price its
products.
d. When barriers to entry are eliminated.
Check Your Knowledge

42. Q2. In which of the following situations can a firm be
considered a monopoly?
a. When a firm is surrounded by other firms that produce close
substitutes.
b. When a firm can ignore the actions of all other firms.
c. When a firm uses other firms’ prices in order to price its
products.
d. When barriers to entry are eliminated.
Check Your Knowledge

43. Problems:
1. Suppose that a monopolist has a total cost (LTC) of 16 + 4Q. Suppose the demand curve is P = 20 – Q. If the
monopolist can charge only one price calculate ??
2. Suppose that a monopolist has a marginal cost of $4, and a fixed cost of $48. Suppose also that the demand
curve is given by Q = 12 – (P/2).
i) What is the marginal revenue of the monopolist as a function of Q?
ii) What is the profit maximizing price and quantity for the monopolist?
iii) What is the efficient price?
iv) What is the deadweight loss from the monopolist’s maximizing profits?
v) What are the monopolist’s profits at the profit maximizing price?