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Chapter 5c

This document discusses monopolistic competition and imperfect markets. It begins by defining monopolistic competition as a market structure with many firms selling similar but not identical products. It notes the characteristics of monopolistic competition include many sellers, product differentiation, and free entry and exit. The document then examines the short and long run equilibrium of monopolistically competitive firms. It notes that inefficiencies exist under monopolistic competition compared to perfect competition due to price being above marginal cost. The document concludes by stating that while monopolistic competition results in inefficiencies, they can be difficult for policymakers to address directly.

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Tafirenyika Sunde
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© © All Rights Reserved
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12 views

Chapter 5c

This document discusses monopolistic competition and imperfect markets. It begins by defining monopolistic competition as a market structure with many firms selling similar but not identical products. It notes the characteristics of monopolistic competition include many sellers, product differentiation, and free entry and exit. The document then examines the short and long run equilibrium of monopolistically competitive firms. It notes that inefficiencies exist under monopolistic competition compared to perfect competition due to price being above marginal cost. The document concludes by stating that while monopolistic competition results in inefficiencies, they can be difficult for policymakers to address directly.

Uploaded by

Tafirenyika Sunde
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MARKET STRUCTURES: IMPERFECT

OR MONOPOLISTIC COMPETITION

The Nature of Monopolistic


Competition
Monopolistic Competition

▪ Monopolistic competition: A market structure in which


many firms sell products that are similar but not identical.

▪ Characteristics
• Many sellers
• Product differentiation
• Free entry and exit
▪ Examples
• Restaurants
• Computer games
• Hotel accommodation
• Beauty consultants
• Opticians
The Monopolistically Competitive Firm
in the Short Run
• The firm in panel (a) makes a • The firm in panel (b) makes
profit because, at this quantity, losses because, at this quantity,
price is above ATC. price is less than ATC.
The Long Run Equilibrium
When firms are making profits new firms have an incentive to enter the market.
Monopolistic Versus Perfect Competition
Panel (a) shows the long run equilibrium Panel (b) shows the long-run equilibrium
in a monopolistically competitive market. in a perfectly competitive market.

• Only the perfectly competitive firm produces at the efficient scale.


• Price equals marginal cost under perfect competition, but price is above
marginal cost under monopolistic competition so exerting market power.
• Monopolistic competition uses advertising to try and establish a brand.
Monopolistic Competition and the
Welfare of Society
Inefficiencies of Monopolistic Competition
(1 of 3)
▪ One source of inefficiency is the mark-up of price
over marginal cost.

• Because of the mark-up, some consumers who value the


good at more than the marginal cost of production (but less
than the price) will be deterred from buying it.

▪ Thus a monopolistically competitive market has the


normal deadweight loss of monopoly pricing.
Inefficiencies of Monopolistic Competition
(2 of 3)
▪ Regulating monopolistic competition is difficult.
• There is a high administration burden.
• Monopolistic competitors are making zero profits
already. Requiring them to lower their prices to equal
marginal cost would cause them to make losses.
Inefficiencies of Monopolistic Competition
(3 of 3)
▪ Therefore the total surplus is not maximized under
monopolistic competition.
▪ Yet because the inefficiencies are subtle, hard to
measure and hard to fix, there is no easy way for
public policy to improve the market outcome.
Summary
15. MARKET STRUCTURES:
OLIGOPOLY
Oligopoly
Characteristics of Oligopoly
▪ Few firms.
▪ Homogeneous product e.g., oil, banking services in the
case of Namibia.

▪ Interdependence in decision making.


Markets With Only a Few Dominant Sellers
▪ Oligopoly is where competition is between a few
firms.
▪A key feature of oligopoly is the tension between
cooperation and self-interest.
• The group of oligopolists is better off cooperating and
acting like a monopoly by limiting output and charging
PRICE above marginal cost.
• Because the oligopolist cares about their own profit, there
is an incentive to act on their own. This limits the ability of
the group to act as a monopoly.

❑ INTERDEPENDENCE
A Duopoly Example
▪ A duopoly is an oligopoly with two members.
• Oligopolies with three or more members face the same
problems as a duopoly.

▪ A duopoly is the simplest type of oligopoly.


▪ As such it is a good starting point to help us
understand the behaviour of oligopolies.
Competition, Monopolies and Cartels

▪ If a market was perfectly competitive, price would equal


marginal cost.
▪ If a monopoly controlled the market, it would set a price
above marginal cost.
▪ The duopolists may agree to act together to set the
price above marginal cost.
• Collusion is an agreement among firms in a market about quantities to
produce or prices to charge.

• A cartel is a group of firms acting in unison.


The Equilibrium for an Oligopoly
▪ Competition laws prohibit explicit agreements among
oligopolists.

▪ Nash equilibrium: A situation in which oligopolies choose


their best strategy given the strategies the others have
chosen.
• Oligopolies would be better off cooperating.
• Instead oligopolies choose self-interest at the expense of
maximizing joint profit.
• Improving market share is important, but at a price above marginal
cost.

▪ The oligopoly price is less than the monopoly price but


greater than the competitive price.
Policies Toward Oligopolies
Restraint of Trade and Competition
Law
▪ Competition laws discourage collusion among
oligopolies.

▪ The EU Competition Commission prohibits price-fixing


and other restrictive practices.

▪ Each country within the EU has its own organizations


that oversee competition laws.
• In the UK, the Competition and Markets Authority (CMA) is the
primary regulatory body for enforcing competition law.
Controversies Over Competition Policy

▪ Resale price maintenance


• A business may wish to protect brand image of which a high price
is part of its marketing strategy.
▪ Predatory pricing
• When firms with monopoly power are faced with new competition,
they may cut prices drastically to drive the new competition out of
business and restore their monopoly power.
• Where is the boundary between predatory and competitive pricing?
▪ Tying
• Where a customer is required to buy something they do not want
as a condition of buying something they do want.
Conclusion

▪ Oligopolies would like to act like monopolies, but


self-interest drives them closer to competition.
▪ Oligopolies
can fail to maintain cooperation, even
when cooperation is in their best interest.
▪ Policymakers regulate the behaviour of oligopolists
through competition law.
THE END

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