Econ 1101 Notes – Monopoly and Other Forms of Imperfect Competition
Chapter 10: Monopoly and other forms of Imperfect CompetitionImperfect Competition and price settersImperfect competition: A market in which firms have at least some ability to set their own priceMarket structures:Perfect competitionImperfect competitioni. Monopolistic competitionii. Oligopoly iii. Monopoly Perfect CompetitionMonopolistic CompetitionOligopoly competition MonopolyMany small firmsLarge number of firms Small number of firms (each has a large share of the market)One firm (supplier)Homogenous productDifferentiated product (Firms compete on product quality, price, marketing, branding)High level of interdependence (Firms tempt to cooperate to ↑ profit)No close substitutesEase of entry/ exitEase of entry/ exitNatural/ legal barriers to entryHigh barriers to entryConcentration——————————————————————————————————–→ 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/ serviceEnjoy 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 existsBarriers to entry (Underpinning the market power)Exclusive control over important inputsIf a firm controls an input essential to the production of a given product → the firm will have market powerGovernment-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 inventionEconomies of scale Doubles all its factors of production and output exactly doubles → production process: constant returns of scaleOutput more than double → production process: increasing returns to scale/ economies of scaleNatural 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 scaleWhen 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 increasesEconomies of scale and the importance of fixed costsNo fixed costs in the long run since all costs can be variedStart-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