This document summarizes key concepts around market power and policy approaches. It discusses how price discrimination by monopolies increases output and profits compared to single-price monopolies. It also describes oligopolies and monopolistic competition as markets with some but not complete power, influenced by product differentiation and number of firms. The document outlines government policies for regulating natural monopolies, including state ownership, cost-plus regulation, and allowing private competition through bidding. It raises issues around determining costs and incentives under different regulatory models.
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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.
Monopoly - Profit-Maximization in Monopoly - EconomicsFaHaD .H. NooR
Monopoly Economics
A monopoly (from Greek μόνος mónos ["alone" or "single"] and πωλεῖν pōleîn ["to sell"]) exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market).[2] Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit.[3] The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices.[4] Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).[4]
A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in which one or a few entities have market power and therefore interact with their customers (monopoly or oligopoly), or suppliers (monopsony) in ways that distort the market.[citation needed]
Monopolies can be established by a government, form naturally, or form by integration.
In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly in a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when business is dominant. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyrights, and trademarks are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly
A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
Imperfect competition covers all situations where there is neither pure competition nor pure monopoly.
Perfect competition and pure monopoly are very unlikely to be found in the real world.
In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition.
Monopoly refers to the market situation where there is a
Single seller selling a product which has no close substitutes.
Monopolies are characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the existence of a high monopoly price well above the firm's marginal cost that leads to a high monopoly profit
The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few” ,few firms or few sellers.
DEFINATION:
Oligopoly is that form of market where there are few firms and there is natural interdependence among the firms regarding price and output policy.
Tnx group 15
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Prepared by Students of University of Rajshahi
MD: AL AMIN
SAIFUL ISLAM
RUKSANA PARVIN RUPA
SHAMIM MIA
LIMA AKTER
3. Last Class
• Studied how to derive monopoly profits in-
depth.
– Find Q using MR and MC
– Calculate profits using ATC
4. Learning Goals for Today
• Show how price discriminating monopoly
surplus differs from generic monopolies.
• Describe how oligopoly and monopolistic
competition differ from monopoly.
• Offer policy recommendations for dealing with
monopolies.
5. Recall: General Form of Monopoly
Problems
• Given:
– Fixed Costs
– Production Function: Generally Q=KaL1-a
– Variable Costs: w for L and r for K
– Demand
• Derive:
– TC, ATC, MC given Fixed Costs, Prod Func, and Var
costs
– MR given Demand
– Profit-max. condition and Profit given the above
– Surplus
6. Price Discrimination
• Thus far we have assumed all buyers charged the same.
• Price Discrimination: The practice of charging different buyers
different prices for essentially the same good.
• How does price discrimination affect output and profits?
P P
CS
DWL
PS PS
MC=ATC MC=ATC
MR D D
Q Q
Perfectly Price
Single-Price Monopolist
Discriminating Monopolist
7. Example: ``Hurdle.’’
• Rebates: The assumption is that people with high reservation
prices are wealthy and that the opportunity cost of their time
is too high to be bothered to fill out the paperwork to get the
rebate.
8. Which of the following is price
discrimination?
A. Efficient
B. Good
C. Inefficient
D. Bad
E. Can’t Say
9. Other types of firms with market
power
• Are there firms that have some, but not
complete market power?
• Think in terms of the assumptions we made
for perfect competition. Which are violated
under what conditions?
– All firms sell the same (really the same!) product.
– There are many buyers and sellers.
– There are no costly barriers to starting a business.
– Both consumers and firms are well-informed.
10. Monopolistic Competition
A market in which a large number of
firms sell products that are close (but
not perfect) substitutes.
Examples?
Have some ability to raise price in the short-run, but free entry will
lead to zero (economic) profits in the long run.
Most important strategic decision: how to differentiate products
from rivals’ products?
Markup
11. Oligopoly
A market in which a small number of large firms sell
products that are either close or perfect substitutes.
Examples?
Usually arise because of cost advantages of being large—
thus, no presumption that free entry will drive profits to
zero, but no guarantee that oligopolists will earn zero profits.
12. Consider two oligopolists. If one is
charging the price a monopoly would
choose, the other should charge which
of the following to profit-maximize?
A. A higher P
B. The same P
C. A lower P
13. Government Regulation
• When we think about government regulation, we primarily
think about regulation of natural monopolies. Why?
• Five sources of market power
1. Exclusive control of inputs
2. Patents and copyrights
3. Government licenses
4. Economies of Scale Can sometimes be thought
of as the same thing—both
5. Network Economies
give rise to natural
monopolies
14. Government Regulation
• State ownership of natural monopolies.
– Only one private company can survive—average costs are
too high when multiple firms are in the market.
– Solution: government takes over, sets P=MC and then
absorbs any loss (paid for by taxes).
– Potential problems:
• Will government-run firm be cost efficient?
• Where do tax revenues come from?
15. Government Regulation
• State regulation of natural monopolies (common in the U.S.).
– Most states regulate electric utilities, natural gas providers,
and cable television companies.
– Cost-plus regulation: figure out the monopolists explicit
costs and then allow them to charge that plus some
markup.
– Problems
1. Often difficult to determine a firm’s costs
2. Blunts firm’s incentive to cut costs.
16. Government Regulation
• Allow private firms to bid for the right to provide the goods
and services that would be provided by a natural monopoly.
– Competition maintains firms’ incentives to cut costs.
– Problems: may not be feasible in cases where production
requires a large fixed investment in capital equipment—
how do you transfer the equipment if another firm wins
the bid?
– Many cities increasing considering or using private
contractors to provide garbage collection, fire protection,
police protection, EMS, landscaping etc.
17. Ignore Monopolies?
• Price discrimination implies that monopolists are making
much of their profit from buyers who are willing and able to
pay higher prices.
• Much of monopolists’ profits goes to the federal government
via the corporate income tax, and this money can be used to
fund a variety of government programs.
• On the other hand, imperfect price discrimination will not
lead to an efficient outcome—so we still need to be
concerned.
18. For next time
• Finish problem set
• Try to grasp Nash equilibria from the reading
• We will begin with oligopolist game