Imperfect competion, 1) Monoploy, Duopoly, Monpolistic, Oligopoly Competition.

1. Imperfect Competition
Dr Murari Premnath Sharma
Asso. Prof.
PDVVP Foundation’s
Institute of Business Management and
Rural Development
Vilad Ghat, Ahmednagar.
Maharashtra. India

2. Market structure
2
Number
of firms
Ability to
affect
price
Entry
barriers
Example
Perfect competition
Imperfect competition:
Monopolistic competition
Oligopoly
Monopoly
Many
Many
Few
One
Nil
Small
Medium
Large
None
None
Some
Huge
Fruit stall
Corner shop
Cars
Post Office

3. 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

4. Imperfect Competition
• Various Forms of Imperfect Competition
– Pure Monopoly (most inefficient)
• The only supplier of a unique product with no close
substitutes
– Oligopoly (more efficient than a monopoly)
• A firm that produces a product for which only a few rival
firms produce close substitutes
– Monopolistic Competition (closest to perfect
competition)
• A large number of firms that produce slightly differentiated
products that are reasonably close substitutes for one
another
– Duo Poly Competition (only two competition)
• Two firms that produces products
Slide 4

5. The Essential Difference Between Perfectly and
Imperfectly Competitive Firms
The perfectly competitive firm faces a perfectly elastic
demand for its product.
The imperfectly competitive firm faces a downward-sloping
demand curve
In perfect competition
Supply and demand determine equilibrium price.
The firm has no market power.
At the equilibrium price, the firm sells all it wishes.
With imperfect competition
The firm has some control over price or some market
power.
The firm faces a downward sloping demand curve.

6. Pure Monopoly
Meaning:-
Monopoly is the form of market organization
in which there is a single firm selling a
commodity for which three are no close
substitutes”.
D. Salvatore
The price is under the full control of the
monopolist but not the demand is
determined by purchasers.

7. Pure Monopoly
Characteristic
• Only one seller in market and large number of
buyers.
• No Close Substitutes
• Product totally differentiated
• No free entry or exit/ Barriers to Entry.
• Full Control over price
• Price discrimination (different price to different Consumer)
• Imperfect information
• Where a perfectly competitive firm is a price taker,
the monopolist is a price searcher.

8. Advantages/Disadvantages of
Monopoly
Advantages
1) Research and Development
2) Economic of Scale
3) Competition for corporate control
Disadvantages
1. Prices and costs
2. Power and wealth.

9. Basic Assumption of Monopoly
Assumptions:-
1) There is one seller or producer of a homogeneous product.
2) 2) There are no close substitutes for the product.
3) The is pure competition in the factor market so that the price of
each input he buys is given to him.
4) The monopolist is a rational being who aims at maximum profit
with the minimum of costs.
5) There are many buyers on the demand side but non is in the
position to influence the price of the product by his individual
actions. Thus the price of the product is given for the consumer.
6) The monopolist does not charge discriminating price. He treats
all consumers alike and charges a uniform price for his product
7) Monopoly price is uncontrolled. Three are no restrictions on the
power of the monopolist.
8) There is no threat of country of other forms.

10. Monopoly prices during short-run
1) Super Normal Profit
2) Normal Profit
3) Minimum Loss

11. Monopoly price during
short run.
MC
ATC
Quantity
D
22
18
14
10
6
2 MR
1 5 10

12. Monopolistically Competitive SR
$
MC
D
Quantity
1 5 10
22
18
14
10
6
2
MR
ATC

13. Monopolist’s Demand Curve
$
Quantity
P*
D
1 5 10

14. Conditions for price Discrimination
Under Monopoly
1) Market Imperfection
2) Agreement among Rival Sellers
3) Geographical or Tariff Barriers
4) Differentiated Products.
5) Ignorance of Buyers.
6) Artificial Differences between Goods.
7) Differences in Demand.

15. Monopolistic Competition

16. Monopolistic Competition
Monopolistic competition refers to market situation where
there are many firms selling a differentiated products. “ There is
competition which is keen, through not perfect, among g many
firms making very similar products”
“ Monopolistic competition is a market structure where there is
large number of small sellers, selling differentiated but close
substitute products”
J.S Bains
“The term monopolistic completion refers to the market
structure in which the sellers do have a monopoly (they are the
only sellers) of their own product, but they are also subjects to
substantial competitive pressures from sellers of substitute
products”. Baumol

17. 17
Monopolistic competition
Characteristics:
• Many sellers in market / many firms/ Large No of Sellers
• Differentiated products /product differentiation
• Ease of entry or exit / no barriers to entry/ Freedom of Entry
or Exit.
• Independent Behaviour
• Products grops
• Selling Costs.
• Control over prices.
• Information is readily available
• Non-price competition usually occurs
• so the firm faces a downward-sloping demand curve
– The absence of entry barriers means that profits are
competed away...

18. Advantages & Disadvantages of Monopolistic
Competition
Advantages
1) There are no significant barriers to entry, therefore markets
are relatively contestable
2) Differentiation creates diversity, choice, and utility.
3) The market is more efficient than monopoly but less efficient
than perfect competition.
Disadvantages :-
1) Some differentiated does not create utility but generates
unnecessary waste. (Extra Packaging, Advertising Expenses)
2) Assuming profit maximization, there is locative inefficiency
in both the long and short run.

19. Price Output Determination in Monopolistic Competition.
(Short run Equilibrium of the Industry
Assumptions:-
1) The number of sellers is large and they act
independently of each other. Each is a monopolist
in his own sphere.
2) The product of each seller is differentiated from
the other products.
3) The firm has a determinate demand curve(AR)
which is elastic.
4) The factor services are in perfectly elastic supply for
the production of the product in question.
5) The short-run cost curves of each firm differ from
each other and
6) No new firms entre the industry.

20. Monopolistic Competition
Demand curves facing the firm
d
d
D
D
p
q
P
Q

21. Edward Chamberlin: Monopolistic
Competition
• Theory of Monopolistic Competition 1933
• Very different starting point from Robinson
• Not an issue with Marshall’s laws of return,
but a response to the existence of
advertising and product differentiation
• Firms have monopoly over their own
brands but there are many close substitutes

22. Monopolistic Competition: Large
Group
• Equilibrium for the individual firm is where mr
(derived from the dd curve) = MC
• For this to be consistent with equilibrium for the
group the firm must also be on its share of the
market demand curve
• In the long run all firms must just be making normal
profits due to free entry condition
• Long run equilibrium will be to the lest of min LRACT

23. Large Group Equilibrium
Short Run
d
d
mr
MC
p
q Q
P
D
D
Long run
LRATC
D
D
d
d
MC
mr
p
q Q
P

24. Small Group Model
• Small number of firms
• Barriers to entry
• If all firms charge the same price then each
firm only faces the DD demand curve
• Similar to monopoly equilibrium
D
p MC
D
MR
q Q
P

25. Monopolistically Competitive SR
$
MC
D
Quantity
1 5 10
22
18
14
10
6
2
MR
ATC

26. Monopolistically Competitive LR
$
MC
D
Quantity
22
18
14
10
6
2 MR
1 5 10
ATC

27. Oligopoly

28. 28
Oligopoly
• A market with a few sellers./A few large firms
• The essence of an oligopolistic industry is the need for
each firm to consider how its own actions affect the
decisions of its relatively few competitors.
• Oligopoly may be characterised by collusion or by non-co-operation.
• A few large firms
• Products standardized or differentiated
• Difficult entry
• Knowledge not available to all firms

29. General Problem of Oligopoly
Analysis
• Problem of interdependence
• Cournot model of duopoly
• Stackelberg and price leadership models
• More recent game theory approaches–
oligopoly as a prisoners’ dilemma game
• Cournot-Nash equilibrium
• One shot and repeated games
• Evolutionary game theory and evolutionary
stable strategies

30. Oligopoly Industries
• Sugar
• Light bulbs
• Gas
• Steel
• Glass

31. Oligopoly Industries
• Autos
• Breakfast cereals
• Cigarette makers
• Soap
• Beer

32. 32
The kinked demand curve
Q0
P0
Quantity
£
Consider how a firm may
perceive its demand curve
under oligopoly.
It can observe the current
price and output,
but must try to anticipate
rival reactions to any
price change.

33. 33
Q0
P0
Quantity
£
The kinked demand curve (2)
The firm may expect rivals
to respond if it reduces
its price, as this will be seen
as an aggressive move
… so demand in response
to a price reduction is likely
to be relatively inelastic.
The demand curve will
D be steep below P0.

34. 34
The kinked demand curve (3)
… but for a price increase
rivals are less likely to
react,
so demand may be
relatively elastic
above P0
so the firm perceives
that it faces a kinked
demand curve.
D
Q0
P0
Quantity
£

35. 35
The kinked demand curve (4)
Given this perception, the
firm sees that revenue will
fall whether price is increased
or decreased,
so the best strategy is to keep
price at P0.
Price will tend to be stable,
even in the face of an increase
in marginal cost.
D
Q0
P0
Quantity
£

36. Concentration Ratio
• A rough measure to gauge whether
or not an industry is an oligopoly
• % of market the largest firms control
• Usually 4-8 firms

37. The Growth of Firms
• Horizontal Mergers
• Combinations of firms in the same industry
• Vertical Mergers
• Two or more firms in different production or
marketing stages within the same industry.
• Conglomerate mergers
• Combinations of firms in unlike industries

38. Theories of Imperfect Competition
• Major Contributors:
– Piero Sraffa (1898-1983)
– Joan Robinson (1903-1983)
– Edward Chamberlin (1899-1967)
• Sraffa’s 1926 article on the laws of return
• Criticism of Marshall’s external economies
as a way of reconciling falling supply prices
with competition
• Need to focus on monopoly

39. Joan Robinson and Imperfect
Competition
• The Economics of Imperfect Competition
(1933)
• Introduction of marginal revenue curves
• Deals with an individual firm assuming the
firm has its own market and faces a
downward sloping demand curve
• In the absence of new entry, the analysis is
as for a monopoly

40. 40
Imperfect competition
• An oligopoly
– an industry with a few producers
– each recognising that its own price depends both on
its own actions and those of its rivals.
• In an industry with monopolistic competition
– there are many sellers producing products that are
close substitutes for one another
– each firm has only limited ability to influence its
output price.

41. 41
: Pricing under Imperfect Competition
Price
P
C
MC
C
MR
D
Quantity
per week
Q
0 C

42. 42
Pricing under Imperfect Competition
Price
P
M
P
A
P
C
MC
C
A
M
MR
D
Quantity
per week
Q
M
Q
A
Q
0 C

43. 43
Cartel Model
• A model of pricing in which firms coordinate
their decisions to act as a multiplant
monopoly is the cartel model.
• Assuming marginal costs are constant and
equal across firms, the cartel output is point
M (the monopoly output) in Figure 11.1.
– The plan would require a certain output by each
firm and how to share the monopoly profits.

44. 44
Cartel Model
• Maintaining this cartel solution poses three
problems:
– Cartel formations may be illegal, as it is in the U.S.
by Section I of the Sherman Act of 1890.
– It requires a considerable amount of costly
information be available to the cartel.
• The market demand function.
• Each firm’s marginal cost function.

45. 45
Cartel Model
– The cartel solution may be fundamentally
unstable.
• Each member produces an output level for which
price exceeds marginal cost.
• Each member could increase its own profits by
producing more output than allocated by the cartel.
• If the cartel directors are not able to enforce their
policies, the cartel my collapse.

46. 46
APPLICATION :- The De Beers Cartel
• In the 1870s the discovery of the rich diamond
fields in South Africa lead to major gem and
industrial markets.
• After a competitive start, the ownership of the
richest mines became incorporated into the
De Beers Consolidated Mines which continues
to dominate the world diamond trade.

47. 47
APPLICATION 11.1: The De Beers Cartel
• Operation of the De Beers Cartel
– Since the 1880s diamonds found outside of South
Africa are usually sold to De Beers who markets
the diamonds to the final consumers through its
central selling organization (CSO) in London.
– By controlling supply, the CSO maintains high
prices which have been estimated to be as much
as one thousand times marginal cost.

48. 48
The Cournot Model
• The Cournot model of duopoly is one in which
each firm assumes the other firm;s output will
not change if it changes its own output level.
• Assume
– A single owner of a costless spring.
– A downward sloping demand curve for water has
the equation Q = 120 - P.

49. 49
APPLICATION :-The De Beers Cartel
• Dealing with Threats to the Cartel
– This large markup promotes threat of entry with
any new diamond discovery.
– De Beers has used its market power to control
would-be-chiselers.
• They drove down prices when the former Soviet Union
and Zaire tried market entry in the 1980s.
• New finds in Australia were sold to the CSO rather than
try to fight the cartel.

50. 50
APPLICATION :- The De Beers Cartel
• The Glamour of D Beers
– De Beers controls most print and television
advertising, including “Diamonds Are Forever”.
– They convinced Japanese couples to adopt the
western habit of buying engagement rings.
– De Beers has attempted to generate a brand name
with customers to get consumers to judge De
Beers diamonds superior to other suppliers.