Collusive oligopoly Monopolistic competition Nature of imperfect competition Theories of imperfect competition

2. Presented To: Sir Hafiz Asim Hafeez
Presented By: Qasim Ali

3. Topics
1. Collusive oligopoly
2. Monopolistic competition
3. Nature of imperfect competition
4. Theories of imperfect competition

4. Collusive Oligopoly
 The degree of imperfect competition in a market is
influenced not just by the number and size of firms but
by their behavior.
 When only a firms operate in a market, they see what
their rivals are doing and react.

5. Characteristics
 In a collusive oligopoly all the sellers work
together.
 By their fixing prices and controlling supply to
ensure maximization of profits.
 Small number of firms have a choice between
(cooperative and non-cooperative) behavior.

6. There Are Two Types Of
Collusive Oligopoly
 Price leadership-Tacit collusion
I. Low price leadership
II. Dominant leadership
III. Barometric price leadership
 Overt collusion-Cartel

7. Examples Of Collusive Oligopoly
 OPEC ( Organization of petroleum exporting countries)
is the best example of collusive oligopoly.
 If there two air lines operating along the same route and
one raises its fare, the other must decide whether to
match the increase or to stay with the lower fare,
undercutting its rival.

8. Equilibrium Point And Loss Or
Profit

9. Analysis Of Collusive Oligopoly
With These Examples
 The main objective of any firm is to maximize its
profit.
 To be a successful firm should follow or obey these
two rules:
1. Set a low production at low price but not too low
2. Maintain their disciplines.
3. Negotiate production quotas rather than product
prices.

10. Monopolistic Competition
 Monopolistic Competition is a market structure in
which many firms sell products that are similar but
not identical.
 Monopolistic competition resembles perfect
competition in three ways which they are shown in
characteristics.

11. Characteristics of monopolistic
competition
Many sellers' firms compete.
Product differentiation each firm
faces downward sloping demand
curves.
Free entry economic profits are
zero.

12. Examples Of Monopolistic
Competition
 Books, CDs, movies, computer software,
restaurants, furniture, and so on.
 There may be several grocery stores in a
neighborhood, each carrying the same goods but at
different locations.
 Gas stations, too, all sells the same product, but
they compete on the basis of location and brand
name.

13. Long-run Equilibrium Normal
Profit or Loss

14. Characteristics Of Normal Profit
 MR = MC, and charging the price at 1.
 2 Market Price = Marginal Cost = A locative
Efficiency
 3 Productive Efficiency = Minimum ATC
 Excess Capacity = Quantity Produced at Minimum
ATC - Quantity that yields the greatest profit (MR
= MC).

15. Short-run Profit

16. Characteristics of short-run profit
 If average total cost is below the market price, then
the firm will earn an economic profit.
D = Market Demand
ATC = Average Total Cost
MR = Marginal Revenue
MC = Marginal Cost
Short-Run Profit = (Price - ATC) × Quantity

17. Short-run Loss

18. Characteristics Of Short-run Loss
 if the average total cost is above the market price,
then the firm will incur losses.
D = Market Demand
ATC = Average Total Cost
MR = Marginal Revenue
MC = Marginal Cost
Short-Run Loss = (ATC - Price) × Quantity

19. Analysis Of Monopolistic Competition
 Each seller has some freedom to raise or lower prices.
 Leads to a downward slope in each seller’s demand
curve.
 Free entry and exit.
 People will pay a premium to be free to choose.

20. The Nature Of Imperfect
Competition
Economics have found that three major factors in perfect
competitive market, regarding determinants of
concentration.
Which are listed below:

21. Three Major Factors
 Cost
 Barriers to entry/ competition
 Strategic interaction

22. Cost
When the maximum “efficient” size of operation for a
firm occurs at a sizeable proportion of the total industry
output, only a few firms can profitably survive.

23. Barriers To Entry
When there are large economies (high start-up costs)
or legal (government restrictions). They will limit
the number of competitors in an industry.

24. Strategic Interaction
 When only a few firms in a market, they will
probably recognize their interdependence.
 Strategic interaction, occurs when each firm’s
business plan depends on the behavior of it’s rivals.

25. Characteristics
 In this market scenario, the seller enjoys the luxury
of influencing the price in order to earn more profits.
 If a seller is selling a non identical good in the
market, then he can raise the prices and earn profits.
High profits attract other sellers to enter the market
and sellers, who are incurring losses, can very easily
exit the market.

26. Analysis
 Imperfect competition generally leads prices that are
above marginal costs.
 Industries behave in certain ways that are inimical to the
public interest.
 High price and poor quality are both undesirable
outcomes.
 Any firm should set reasonable price with the good
quality of that product.

27. Theories Of Imperfect Competition
This theory is totally based on its major three most
important cases which are listed below:
1. Collusive oligopoly
2. Monopolistic competition
3. Small-number oligopoly

28. Analysis
 This theory does not consider competition within the
monopoly sector.
 Price formation-conflict of prices between commercial
industrial monopolies and non-monopolies.
 Both firms divide it’s profit and to bear it’s losses.
 Acting as either seller or buyer, receives surplus profit
as the income of small capitalism.
 Sectors are saturated with small capitalists and feature
high production costs and low profitability.
 Criticism of the theory among capitalist economists is
directed not against.

29. Thank you