Introduction to Imperfect Competition

Overview

• Lecturer: Jacob Reed from ReviewEcon.com
• Focus: Imperfect competition in markets
• Additional Resources: ReviewEcon.com for a total review booklet

Perfect vs. Imperfect Competition

• Perfectly Competitive Markets: Covered in Unit 2 (supply and demand craft)
• Perfectly Competitive Firms: Covered in Unit 3 (individual businesses within a perfectly competitive market)
• Reality: Most markets are not perfectly competitive; they are imperfectly competitive

Types of Imperfectly Competitive Markets

1. Monopoly
   • Dominated by one business
   • High barriers to entry
   • Unique product with no close substitutes
   • Firm has significant pricing power (monopoly power)
2. Oligopoly
   • Few large firms dominate the market
   • High barriers to entry (e.g., high startup costs, government regulations, customer loyalty)
   • Firms have pricing power due to limited competition
3. Monopolistic Competition
   • Many sellers with differentiated products
   • Low barriers to entry
   • Firms earn zero economic profit in the long run
   • Firms are price seekers with some pricing power
   • Example: Shoe market

Characteristics of Monopolistic Competition

• Many Sellers: Numerous businesses compete
• Low Barriers to Entry: Easy to enter/exit the market
• Zero Economic Profit in the Long Run: Due to new firms entering and exiting the market
• Product Differentiation: Products are different but highly substitutable
• Pricing Power: Firms are price seekers

Characteristics of Oligopoly

• Few Sellers: Dominated by a small number of firms
• High Barriers to Entry: Difficult for new firms to enter (e.g., high startup costs, regulations)
• Pricing Power: Due to limited competition

Characteristics of Monopoly

• Single Seller: One firm dominates the market
• High Barriers to Entry: Extremely difficult for new firms to enter
• Unique Product: No close substitutes
• Significant Pricing Power: Also known as monopoly power

Demand Curves in Imperfect Competition

• Perfectly Competitive Firms: Price takers with a horizontal demand and marginal revenue curve
  • Equilibrium price set by market supply and demand
  • Selling above equilibrium price results in zero sales
  • Selling below equilibrium price still results in maximum sales but lower profit
• Imperfectly Competitive Firms: Price seekers with a downward-sloping demand curve
  • Increasing price results in fewer sales
  • Lowering price results in more sales
  • Marginal revenue is typically below the demand curve

Marginal Revenue in Imperfect Competition

• Example Table: Demonstrates relationship between quantity, price, total revenue, and marginal revenue
  • Increasing production often requires lowering prices
  • Marginal revenue decreases as more units are produced
• Graphing: Demand curve and marginal revenue curve
  • Marginal revenue curve lies below the demand curve (twice the slope)

Efficiency in Imperfect Competition

• Perfectly Competitive Firms: Price at marginal cost (MR = MC) and are allocatively efficient
  • Produce where marginal cost equals marginal benefit (demand curve)
• Imperfectly Competitive Firms: Produce where MR = MC but price at the demand curve
  • Price is above marginal cost, leading to allocative inefficiency
  • Results in deadweight loss due to underproduction and overcharging

Conclusion

• Introduction to imperfectly competitive markets
• Detailed exploration of each market structure to follow in the unit
• Additional help available at ReviewEcon.com with the total review booklet