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Imperfect competion 2
This document provides an overview of imperfect competition. It discusses the key characteristics of monopolistic competition, oligopoly, and monopoly market structures. For each structure, it outlines the number of firms, ability to affect price, entry barriers, and examples. The document then examines pricing decisions under imperfect competition and provides examples of the De Beers cartel, which dominated the global diamond industry through controlling supply. In summary, the document analyzes different forms of imperfect competition and pricing models.
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Imperfect competion 2
- 1. Imperfect Competition DrMurari 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 DifferenceBetween 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 ofMonopoly 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 duringshort-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 priceDiscrimination 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.
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- 16. Monopolistic Competition Monopolisticcompetition 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 & Disadvantagesof 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 Determinationin 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 Demandcurves 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
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- 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 ofOligopoly 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 kinkeddemand 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 kinkeddemand 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 kinkeddemand 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 ofFirms • 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 ImperfectCompetition • 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 andImperfect 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 : Pricingunder Imperfect Competition Price P C MC C MR D Quantity per week Q 0 C
- 42. 42 Pricing underImperfect 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 CournotModel • 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 :-TheDe 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.