This chapter discusses different types of market structures beyond perfect competition, including imperfect competition in both selling and buying. It provides examples of monopolistic competition, oligopolies, and monopolies as imperfect competitors in selling, characterized by their ability to influence prices through product differentiation or barriers to entry. On the buying side, the chapter examines monopsonistic competition, oligopsonies, and monopsonies as imperfect competitors who are not price takers. The chapter concludes by outlining various governmental regulatory measures implemented to counteract the adverse effects of imperfect competition in markets.
Students should be able to:
Understand the assumptions of perfect competition and be able to explain the behaviour of firms in this market structure.
Understand the significance of firms as price-takers in perfectly competitive markets. An understanding of the meaning of shut-down point is required. The impact of entry into and exit from the industry should be considered.
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.
Chapter 13A monopolistically competitive market is characterized.docxketurahhazelhurst
Chapter 13
A monopolistically competitive market is characterized by:
· many buyers and sellers,
· differentiated products, and
· easy entry and exit.
The monopolistically competitive market is similar to perfect competition in that there are many buyers and sellers who can enter or leave the market easily in response to economic profits or losses. A monopolistically competitive firm, though, is similar to a monopoly in that it produces a product that is different from that produced by all other firms in the market. The restaurant market in New York City provides a good example of a monopolistically competitive market. Each restaurant has its own recipes, decor, ambiance, etc. but also must compete with many other similar restaurants.
Because each firm produces a differentiated product, it won't lose all of its customers if it raises its prices. Thus, a monopolistically competitive firm faces a downward sloping demand curve for its product. As noted in Chapters 8 and 10, whenever a firm faces a downward sloping demand curve, its marginal revenue curve lies below its demand curve. The diagram below illustrates the relationship that exists between a monopolistically competitive firm's demand and marginal revenue curves.
While the diagram above seems similar to the demand and marginal revenue curves facing a monopolist, there is a critical difference. In a monopolistically competitive market, the number of firms changes as firms enter or leave the industry. When new firms enter the market, the customers are spread over a larger number of firms and the demand for each firm's product declines. An increase in the number of firms also tends to result in an increase in the elasticity of demand for each firm's products (since demand is more elastic when more substitutes are available). The diagram below illustrates the shift in a typical firm's demand curve that occurs when additional firms enter a monopolistically competitive market.
Short-run and long-run equilibrium in monopolistically competitive markets
Let's examine the determination of short-run equilibrium in a monopolistically competitive output market.
The diagram below illustrates a possible short-run equilibrium for a typical firm in a monopolistically competitive market. As with any profit-maximizing firm, a monopolistically competitive firm maximizes its profits by producing at a level of output at which MR = MC. In the diagram below, this occurs at an output level of Qo. The price is determined by the amount that customers are willing to pay to buy Qo units of output. In the example below, the demand curve indicates that a price of Po will be charged when Qo units of output are sold.
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14. Unlike perfect competitors who face a perfectly elastic demand curve, imperfect competitors selling a differentiated product benefit from a downward sloping demand curve Page 150
15. Page 150 See table 11-1 on page 199 The marginal revenue in this instance is also downward sloping, and goes to zero at the point where total revenue peaks
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18. Short run profits . The firm produces Q SR where MR=MC at E above, but prices its products at P SR by reading off the demand curve which reveals consumer willingness to pay Page 150
19. Short run loss . The firm suffers a loss in the current period following the same strategy of operating at Q SR given by MC=MR at point E. Page 150
20. At quantity Q SR , average total cost (ATC SR ) is greater than P SR , which creates the loss depicted above… Page 150
21. In the long run, profits are bid away as more firms enter the market. Or losses will no longer exist as firms leave the market. At Q LR , the remaining firms are just breaking even as shown by the lack of gap between the demand curve and ATC curve. Page 151
22. Top 10 Burger Restaurants Page 152 Imperfect competition you face weekly
23.
24. Page 154 Demand curve DD represents the case when all oligopolists move prices together and share the market.
25. Page 154 Why? Rival oligololists will match price cuts but not price increases in the short run because they want to capture a larger market share. Demand curve dd represents the case when a single firm changes its price above P e at point 1. This leads to a kinked demand curve d1D and a discontinuous marginal revenue curve.
26. Page 154 Meeting demand along the lower segment of the kinked demand curve, the firm is maintaining its market share.
27. Page 154 Note that shifting MC curves reflecting technological advances will not affect P E and Q E . It does affect profit however (MC drops from point 3 to point 4).
28.
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30. Page 156 Total revenue is equal to the area 0P E CQ E , which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A), but then reads up to the demand curve (point C) when setting price P E .
31. Page 156 Total variable costs for the monopolist is equal to area 0NAQ E , or the yellow box to the left.
32. Page 156 Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left…
33. Page 156 Total cost is therefore equal to area 0MBQ E , or the green box plus the yellow box to the left
34. Page 156 Finally, the economic profit earned by the monopolist is equal to area MP E CB, or total revenue (blue box) minus total costs (green box plus yellow box).
35. Page 157 Let’s compare a monopoly with perfect competition from an economic welfare perspective
36. Page 157 Consumer surplus under perfect competition is equal to the sum of areas 1, 4, 5, 8 and 9, or the blue triangle to the left Perfect Competition Case
37. Page 157 Producer surplus under perfect competition is equal to the sum of areas 2, 3, 6 and 7, or the green triangle to the left Perfect Competition Case
38. Page 157 Total economic surplus under perfect competition is therefore equal to the blue and green triangles to the left, or the sum of areas 1 through 9. Perfect Competition Case
39. Page 157 Consumer surplus under a monopoly is equal to the sum of areas 8 and 9, or the new blue triangle to the left Thus, consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price P M for a smaller quantity Q M . Monopoly Case
40. Page 157 Producer surplus under A monopoly is equal to the sum of areas 3, 4, 5, 6 and 7, or the green area to the left. Thus, producers lose area 2 but gain areas 4+5, making them economically better-off than perfect competitors Monopoly Case
41. Page 157 Finally, society as a whole would be economically worse-off by areas 1+2. This is called a dead weight loss. This reflects the fact that less of the economy’s available resources in this market are being used to provide products to consumers…. Monopoly Case
46. Page 160 Marginal revenue product same as marginal value product under perfect competition. Buying Decisions by Perfect Competitors
47. Page 160 Buying Decisions by Perfect Competitors Review graph on page 161 in Chapter 7 for more background on the MVP=MIC concept
48. Page 160 Buying Decisions by a Monopsonist Monopsonist makes decesions along the marginal reveuve product curve, which now differs from MVP. The firm will equate MRP=MIC at point A and decide to buy quantity Q M
49. Page 160 Buying Decisions by a Monopsonist This causes price to fall from P PC to P M which is referred to as monopsonistic explotation .
50. Page 161 Case #1 : Monopsonist in buying and sole seller of product. Equilibrium is where MRP=MIC at Point A. Pricing off supply curve gives Q MM and P MM .
51. Page 161 Case #2 : Perfect competition in buying but monopoly in selling. Equilibrium is where MRP=Supply at Point C which gives Q PCM and P PCM .
52. Page 161 Case #3 : Perfect competition in selling but monopsony in buying. Equilibrium is where MVP=MIC at Point E. Pricing off supply curve gives Q MPC and P MPC .
53. Page 161 Case #4 : Perfect competition in both selling and buying. Equilibrium is where MVP=Supply at Point F which gives Q PC and P PC .
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55.
56. Page 162 Various segments of the livestock industry Exhibit several forms of imperfect competition.
57. Governmental Regulatory Measures Various approaches have been taken over time to Counteract adverse effects of imperfect competition In the marketplace. These include 1.Legislative acts passed by Congress, including the Sherman Antitrust Act 2.Price ceilings 3.Lump-sum Tax 4.Minimum price or floors Page 162
58.
59. Page 164 #2: Implications of a Price Ceiling Without regulatory interference, the monopolist will equate MR and MC at point C, produce Q M and charge price P M .
60. Page 164 #2: Implications of a Price Ceiling The monopolist’s profit is equal to AP M BC or the blue box to the left.
61. Page 164 #2: Implications of a Price Ceiling If government imposes a price ceiling P MAX , the demand curve is given by P MAX ED. This is also MR up to Q 1 . Beyond Q1, FG becomes the MR curve.
62. Page 164 #2: Implications of a Price Ceiling The price ceiling has the effect of of causing the monopolist to produce more (Q 1 >Q M ) at a lower price (P MAX <P M ).
63. Page 164 #2: Implications of a Price Ceiling The monopolist’s profit falls to area IP MAX EH or green box above.
64. Page 165 #3: Implications of Lump-Sum Tax The monopolist equates MC=MR at point F, producing Q M , and reading up to the demand curve at point B and charging P M .
65. Page 165 #3: Implications of Lump-Sum Tax The lump-sum tax on the monopolist raises the firm’s average total costs from ATC 1 to ATC 2 . This lowers the monopolist’s producer surplus from AP M BC to EP M BT, but does not change its level of output or price.
66. Page 165 #3: Implications of Lump-Sum Tax The lump-sum tax on the monopolist raises the firm’s average total costs from ATC 1 to ATC 2 . This lowers the monopolist’s producer surplus from AP M BC to EP M BT, but does not change its level of output or price. The loss in producer surplus is area AETC or blue box above.
67. Page 166 #4: Implications of Minimum Price Without a minimum price, the monopsonist would equate MRP=MIC and employ Q M units of the input and pay P M .
68. Page 166 #4: Implications of Minimum Price If a minimum price P F is imposed (think of a minimum wage rate), the monopsonist’s MIC curve would be P F DCB. Here the firm would actually employ more of the resource.