Econ 1101 Notes - Monopoly and Other Forms of Imperfect Competition
Autor: peterchan054 • May 24, 2016 • Coursework • 6,099 Words (25 Pages) • 782 Views
Chapter 10: Monopoly and other forms of Imperfect Competition
Imperfect Competition and price setters
Imperfect competition: A market in which firms have at least some ability to set their own price
Market structures:
- Perfect competition
- Imperfect competition
i. Monopolistic competition
ii. Oligopoly
iii. Monopoly
Perfect Competition | Monopolistic Competition | Oligopoly competition | Monopoly |
Many small firms | Large number of firms | Small number of firms (each has a large share of the market) | One firm (supplier) |
Homogenous product | Differentiated product (Firms compete on product quality, price, marketing, branding) | High level of interdependence (Firms tempt to cooperate to ↑ profit) | No close substitutes |
Ease of entry/ exit | Ease of entry/ exit | Natural/ legal barriers to entry | High barriers to entry |
Concentration--------------------------------------------------------------------------------------------------------→ |
A perfectly competitive firm faces a perfectly elastic demand curve (price taker) whereas imperfectly competition firm faces a downward sloping demand curve[pic 1]
Downward sloping because imperfectly competitive firms:
- Are price setters, who have influence on the price of the good/ service
- Enjoy market power (the ability to raise the price without losing all its sales), this ability is derived from the fact that no perfect substitute for its good exists
Barriers to entry (Underpinning the market power)
- Exclusive control over important inputs
- If a firm controls an input essential to the production of a given product → the firm will have market power
- Government-created monopolies
- Government often confer market power on firms by limiting the extent to which other firms can enter a market through the issue of patent and copyright protection and granting of licenses and franchises
- Eg. For the life of patent, only the patent holder may legally sell the good/ service → this protection enables the patent holder to set a price above the marginal cost of production to recoup the cost of invention
- Economies of scale
- Doubles all its factors of production and output exactly doubles → production process: constant returns of scale
- Output more than double → production process: increasing returns to scale/ economies of scale
- Natural monopoly: results from economies of scale, a single firm can serve the entire market at a lower cost than can two or more firms
- Network economies
- Similar to economies of scale
- When network economies are of value to the consumer, a product’s quality increases as the number of users increases → any given quality level can be produced at lower costs as sales volume increases
Economies of scale and the importance of fixed costs
- No fixed costs in the long run since all costs can be varied
- Start-up costs can be substantially larger (fixed costs for starting up) but marginal costs can be very low afterwards (low reproduction costs)
→ Fixed costs do not increase as output increases, the average total cost of production for such goods will decline steadily (becomes very close to marginal cost) as output increases →Many industries are dominated by either a single/ small number of firms
...