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Imperfect Market

Prof. Swati Basu Ghose

MSRIM,Bangalore

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Imperfect Competition

Imperfect competition includes

industries in which firms havecompetitors but do not face somuch competition that they are

price takers.

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The Four Types of Market Structure

Monopoly Oligopoly Monopolistic

Competition

Perfect

Competition

Tap water

Cable TV

Tennis balls

Crude oil

Novels

Movies

Wheat

Milk

Number of Firms?

Type of Products?

Manyfirms

One

firm Fewfirms Differentiated

productsIdenticalproducts

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Monopolistic Competition

Many buyers and sellers

Products differentiated

Relatively free entry and exit

Each firm may have a tiny µmonopoly¶ becauseof the differentiation of their product

Firm has some control over price

Examples ± restaurants, professions ±solicitors, etc., building firms ± plasterers,plumbers, etc.

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Monopolistic Competition

Many firms selling products that

are similar but not identical.

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Characteristics of an Oligopoly

Market

Few sellers offering similar or identicalproducts

Interdependent firms Best off cooperating and acting like a

monopolist by producing a small quantity of output and charging a price above marginalcost

There is a tension between cooperation andself-interest.

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Oligopoly ± Competitionamongst the few

Industry dominated by small number of large firms

Many firms may make up the industry

High barriers to entry

Products could be highly differentiated ± branding orhomogenous

Non±price competition

Price stability within the market - kinked demandcurve?

Potential for collusion? Abnormal profits

High degree of interdependence between firms

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Examples of Oligopolistic

structures

Supermarkets

Banking industry

Chemicals

Oil

Medicinal drugs

Broadcasting

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Oligopoly

Only a few sellers, each offering asimilar or identical product to theothers.

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Market StructureKinked Demand Curve

Price

Quantity

D = elastic

D = Inelastic

£5

100

Kinked D Curve

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A Duopoly Example

A duopoly is an oligopoly withonly two members. It is thesimplest type of oligopoly.

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Market Structure Duopoly: Industry dominated by two large

firms Possibility of price leader emerging ±

rival will follow price leaders pricingdecisions

High barriers to entry Abnormal profits likely