Imperfect Competition

1
Imperfect Competition

• Between Perfect Competition and Monopoly there is
  Imperfect Competition.
• We will examine two models of imperfect
  competition
• Monopolistic Competition
• the oldest model
• developed by Edward Chamberlin and Joan Robinson
• Oligopoly
• represented by many models and techniques
• specifically, we will examine cooperative
  oligopoly or cartels.

2
Monopolistic Competition

• Monopolistic Competition - A market structure
  characterized by a large number of sellers of
  differentiated products.
• Characteristics of Monopolistic Competition
• Large number of buyers and sellers
• Free entry and exit
• Perfect information
• Products are differentiated
• Firms profit maximize
• The differentiation of products results in a
  downward sloping demand curve.
• Why? When price rises, demand does not go to
  zero. (i.e. brand loyalty)

3
Short-Run vs. Long-Run

• Short-run PgtMC and potentially PgtATC
• Long-run PgtMC PATC
• Key idea MC does not equal ATC
• Excess capacity theorem - in monopolistic
  competitor in long-run equilibrium will produce
  less output than the level of output that will
  minimize ATC.
• Why? The product is differentiated. This means
  the demand curve is downward sloping. Hence, P gt
  MR.

4
Implications of Monopolistic Competition

• Question? Which is a better society
  Monopolistic Competition or Perfect Competition
• Edward Chamberlin - believed the difference
  between the cost of a perfect competitor and the
  cost of a monopolistic competitor was the cost of
  what he called differentness Chamberlin
  believed that if the differences were not
  important consumers would not pay. Is this
  necessarily true?

5
Oligopoly

• Oligopoly - a market structure characterized by a
  few sellers and interdependent price/output
  decisions.
• Characteristics
• Few buyers and sellers (Heavily Concentrated)
• Homogenous or Unique product
• Barriers to entry
• Imperfect information
• Firms profit maximize
• In Perfect Competition, Monopolistic Competition
  and Monopoly the decisions of one firm does not
  impact the decisions of other firms. There is no
  interdependence. This is not true in oligopoly,
  making it a very difficult market structure to
  examine.
• Consequently, Oligopoly, unlike other market
  structures, is not best characterized by one
  model, but rather different models are used to
  discuss different aspects of these markets.

6
Cooperative Oligopoly The Cartel

• Cartel - an organization of firms that reduces
  output and increases price in an effort to
  increase joint profits.
• Primary problem with cartels Firms always have
  an incentive to cheat.
• The tendency to cheat can be illustrated.