Introduction to Imperfect Competition

Overview

Imperfect competition is the focus of this lecture.
Most markets are imperfectly competitive, unlike perfectly competitive markets covered in previous units.
Types of imperfectly competitive markets include:
- Monopoly
- Oligopoly
- Monopolistic Competition

Characteristics:
- Many sellers
- Low barriers to entry, allowing easy market entry and exit.
- Long-run zero economic profit due to competition.
- Differentiated products, unlike identical products in perfect competition.
- Gives firms pricing power – they are price seekers, not takers.
Example: Shoe market.

Characteristics:
- Few large firms dominate the market.
- High barriers to entry, such as high startup costs, regulations, and customer loyalty.
- High barriers give firms significant pricing power.

Characteristics:
- Single seller dominates the market.
- Extremely high barriers to entry, preventing new competitors.
- Unique product with no substitutes.
- Known for significant pricing power (monopoly power).

Perfectly Competitive Markets:
- Firms are price takers.
- Face horizontal demand and marginal revenue curve.
- Sell all units at the market equilibrium price.
Imperfectly Competitive Markets:
- Firms are price seekers.
- Face downward-sloping demand curves.
- Must lower prices to sell additional units, affecting marginal revenue.
- Example provided with a table showing different prices and outputs.
- Marginal Revenue Curve is below Demand Curve on graphs.

Perfectly Competitive Firms:
- Price at marginal cost, achieving allocative efficiency at MR = MC.
Imperfectly Competitive Firms:
- Price is above marginal cost at MR = MC (profit-maximizing quantity).
- Not allocatively efficient as they underproduce and overcharge.
- Result in deadweight loss due to inefficiency.