Monopoly & Imperfect Competition

8/12/2019 Monopoly & Imperfect Competition

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Chapter 9

Monopoly and Imperfect

Competition


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Industry- a group of firms selling thesame commodity or service.

Market structure- describes the presenceor absence of competition in a givenmarket.


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Four major types ofindustry structure:

Perfect competitionDifferentiated or monopolistic competitionOligopolyMonopoly


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Cost and market structure

The behavior of the average cost of the firm is thecritical factor that helps to determine whether anindustry has numerous sellers in competition or fewer

ones.The average cost of production determines whether afirm is capable of supplying only a small portion ofmarket demand or the whole of it.* The key explanation to the formation of these marketstructures is the relationship of the average cost ofproduction to the size of the market demand beingserved.


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Perfect or purecompetition

It refers to a situation in which the buyersand sellers are very small participants in

the market. It is in the sense that,sometimes, this type of market is alsocalled atomistic competition.

In perfect competition, the seller is sosmall in relation to the whole size of themarket.


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Differentiated ormonopolistic competition

In this market, there are many sellers thatserve the same market. The size of the

firm can be relatively significant to totalmarket size.Entry of competition in monopolisticcompetition is relatively easy. Because ofthis, firms in monopolistic competitionmake great efforts to differentiate theirproduct from other competitors.


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Oligopoly

When the average cost curve displayslarge economies of scale and several

firms can account for the total marketdemand, an oligopoly market is verylikely.

In oligopoly, the firms that are already inthe market have an edge over thepotential competitors.


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Monopoly

The average cost curve of the monopolistkeeps on falling until competitors find it

difficult to compete. The monopoly ischaracterized by a declining average costof production. This is because, as more

output is produced, the marginal costkeeps falling.


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Why market imperfectionsare common in developing

countriesThe relative smallness of market demand cancreate a market monopoly. Marketopportunities are therefore also very limited.Social customs and other kinds of non-economic factors might cause markets to befragmented.The organized market for goods is also limitedbecause of the inadequacy of market demand.Market information can also be very limited andat times inaccurate, the poorer the economy is.


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Price- output determinationin a monopoly

The decision problem of a monopoly ishow to maximize profits like any firm in

any market. The results of price-outputdetermination are different fromcompetition because of the peculiar

conditions confronting a monopoly.


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Monopoly Equilibrium

The monopolist has market power. He isable to adjust his output level to the

MR=MC equality. At that point, the profitlevel of the firm is maximized. The priceper unit is the average revenue. Or

P=AR.


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Welfare loss frommonopoly

The monopolist maximizes profit atMR=MC. This leads to a price, that is far

higher than the industry solution underpure competition.Under monopoly equilibrium, consumer

welfare is reduced.


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Price discrimination

It involves charging different prices forthe same product. It means that, along

the demand schedule, the monopolistcharges a high price for consumers whohave a willingness to pay for the product

at a high price and a low price for thosewilling to pay only at a lower price.


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Income tax

the income or the profit of the monopolistresults from taking away all costs from

the sales revenue. Since profits orincome is a residual of this calculation, allcosts and all revenues are already taken

into account. In short, the tax on incomedoes not affect revenue or costs.


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Commodity taxation

The effect of tax per unit or ad valoremtax is to alter cost curves. Suppose the

product of the monopolist is electricpower and there is a tax on per kilowatt-hour of electricity.The tax is a three-level progressive tax,meaning, the tax rate increases at aprogressively rising level as theconsumption of electricity rises.


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Imperfect Competition

Arises when some sellers acquire adegree of control over the outcome of

price and quantity equilibrium in themarket. This often results from havingsome significance in size relative to the

market.


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Differentiated ormonopolistic competition

It is characterized by the presence ofmany sellers.

Sellers try to have a degree of controlover the product through various means,such as by differentiating the product

from that of the competition.


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The firm in monopolisticcompetition

At first the firm's short run demandschedule makes it possible to earn profits

when it sets output and price whereMR=MC. The firm earns monopolyprofits, because the price charged is

above the cost per unit.


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Competition among thefew

Competition rules depend on what themarket leaders do.

A price war could lead to gains in marketshare by some competitors and the lossof some by others. Sometimes, it even

happens that the highest cost seller iswiped out in the market.


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Kinked demandhypothesis

The kinked demand curve theory is an economictheory regarding oligopoly and monopolistic competition .When it was created, the idea fundamentally challengedclassical economic tenets such as efficient markets andrapidly-changing prices, ideas that underlie basic supplyand demand models. Kinked demand was an initialattempt to explain sticky prices."Kinky" demand curves and traditional demand curves

are similar in that they are both downward-sloping. Theyare distinguished by a hypothesized convex bend with adiscontinuity at the bend - the "kink." Therefore, the firstderivative at that point is undefined and leads to a jumpdiscontinuity in the marginal revenue curve.
http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Monopolistic_competitionhttp://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Sticky_(economics)http://en.wikipedia.org/wiki/Demand_curvehttp://en.wikipedia.org/wiki/Discontinuityhttp://en.wikipedia.org/wiki/Jump_discontinuityhttp://en.wikipedia.org/wiki/Jump_discontinuityhttp://en.wikipedia.org/wiki/Marginal_revenuehttp://en.wikipedia.org/wiki/Marginal_revenuehttp://en.wikipedia.org/wiki/Jump_discontinuityhttp://en.wikipedia.org/wiki/Jump_discontinuityhttp://en.wikipedia.org/wiki/Discontinuityhttp://en.wikipedia.org/wiki/Demand_curvehttp://en.wikipedia.org/wiki/Sticky_(economics)http://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Supply_and_demandhttp://en.wikipedia.org/wiki/Monopolistic_competitionhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economics


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Game theory

A branch of economics that assumes thateconomic outcomes are conditioned by

uncertainty and risk. In this world,interactions of economic players can beanalyzed in a way that certain profits or

losses are earned through the movesthat participants make in a game ofinteraction.


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A price-fixing game

One type of competition is through price-cutting. The issue is what competitors

would do in the face of the possibility oftheir main competitor either maintainingcurrent prices or reducing them.

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Monopoly & Imperfect Competition