Imperfect Competition in Microeconomics

Overview

• Focus on Unit Four: Imperfect Competition
• Types of imperfect markets:
  • Monopoly: One business dominates an industry.
  • Oligopoly: A few businesses dominate a market.
  • Monopolistic Competition: Many sellers with differentiated products.

Characteristics of Imperfectly Competitive Markets

• Firms lower prices to sell more output.
• Demand and Marginal Revenue:
  • Price must decrease to sell additional units.
  • Marginal revenue is below demand.
• Graphical Representation:
  • Downward sloping demand and average revenue.
  • Marginal revenue curve falls below demand curve.

Elasticity and Demand Curves

• Elastic range: Marginal revenue positive.
• Unit elastic point: Marginal revenue intersects axis.
• Inelastic range: Marginal revenue negative.

Profit Maximization

• Firms maximize profit where marginal revenue equals marginal cost (MR = MC).
• Price above marginal cost, not allocatively efficient.
• Dead weight loss occurs in imperfectly competitive markets.

Monopolies

• Characteristics:
  • One seller, unique product, high barriers to entry.
  • Price seekers with strategic pricing based on demand curve.
• Graphical Analysis:
  • Profit maximization at MR = MC.
  • Pricing is above average total cost (ATC).
• Economic Profit:
  • Long run profit possible due to high entry barriers.
  • Economic profit or loss determined by ATC curve's position relative to demand.
• Economies of Scale:
  • Monopolies can capture economies of scale but are not productively efficient.

Comparison to Perfect Competition

• Higher prices and lower quantities in monopoly compared to perfect competition.
• Socially optimal quantity: Where price equals marginal cost (P = MC).

Special Monopoly Cases

• Natural Monopoly:
  • Captures economies of scale, e.g., public utilities.
  • Continually downward sloping average total cost.
• Price Discrimination:
  • Charging different prices to different consumers.
  • Converts consumer surplus into profit.
  • Perfect price discrimination eliminates dead weight loss.

Monopolistic Competition

• Traits:
  • Many sellers, low barriers to entry, differentiated products.
  • Influence on price through differentiation and advertising.
• Graphical Analysis:
  • Similar to monopoly graph.
  • Long run equilibrium: Price equals average total cost.
• Economic Profit:
  • Short run profits attract new firms, shifting demand.
  • Long run equilibrium results in zero economic profit.

Oligopoly

• Few dominant sellers, high barriers to entry, strategic pricing.
• Game Theory:
  • Interdependent strategic behavior.
  • Payoff matrix to analyze outcomes.
  • Dominant strategy: Best action regardless of other player’s actions.
  • Nash Equilibrium: No player benefits from changing strategy unilaterally.

Additional Resources

• Practice games and review materials available at ReviewEcon.com.
• Consider using the Total Review Booklet for comprehensive exam preparation.

Remember to review graph drawing skills, key concepts of market structures, and strategic decision-making dynamics relevant to each market type.