between monopoly and perfect competition

8/14/2019 Between Monopoly and Perfect Competition

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Oligopoly


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BETWEEN MONOPOLY ANDPERFECT COMPETITION

Imperfect competition refers to those market

structures that fall between perfect competition

and pure monopoly.


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Imperfect competition includes industries in

which firms have competitors but do not face

so much competition that they are price takers.


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Types of Imperfectly Competitive Markets

Oligopoly

Only afew sellers, each offering a similar or identical

product to the others. Monopolistic Competition

Many firms selling products that are similar but not

identical.


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Figure 1 The Four Types of Market Structure

Copyright 2004 South-Western

Tap water

Cable TV

Monopoly

Novels

Movies

Monopolistic

Competition

Tennis balls

Crude oil

Oligopoly

Number of Firms?

Perfect

Wheat

Milk

Competition

Type of Products?

Identical

products

Differentiated

products

One

firm

Few

firms

Many

firms


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MARKETS WITH ONLY A FEWSELLERS

Because of the few sellers, the key feature of

oligopoly is the tension between cooperation

and self-interest.


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MARKETS WITH ONLY A FEWSELLERS

Characteristics of an Oligopoly Market

Few sellers offering similar or identical products

Interdependent firms

Best off cooperating and acting like a monopolist

by producing a small quantity of output and

charging a price above marginal cost


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A Duopoly Example

A duopoly is an oligopoly with only two

members. It is the simplest type of oligopoly.


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Competition, Monopolies, and Cartels

The duopolists may agree on a monopoly

outcome.

Collusion

An agreement among firms in a market about quantitiesto produce or prices to charge.

Cartel

A group of firms acting in unison.


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The Equilibrium for an Oligopoly

ANash equilibrium is a situation in which

economic actors interacting with one another

each choose their best strategy given the

strategies that all the others have chosen.


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When firms in an oligopoly individually choose

production to maximize profit, they produce

quantity of output greater than the level

produced by monopoly and less than the levelproduced by competition.


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The oligopoly price is less than the monopoly

price but greater than the competitive price

(which equals marginal cost).


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Equilibrium for an Oligopoly

Summary

Possible outcome if oligopoly firms pursue their

own self-interests:

Joint output is greater than the monopoly quantity but lessthan the competitive industry quantity.

Market prices are lower than monopoly price but greater

than competitive price.

Total profits are less than the monopoly profit.


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How the Size of an Oligopoly Affects theMarket Outcome

How increasing the number of sellers affects

the price and quantity:

The output effect: Because price is above marginal

cost, selling more at the going price raises profits. The price effect: Raising production will increase

the amount sold, which will lower the price and the

profit per unit on all units sold.


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How the Size of an Oligopoly Affects theMarket Outcome

As the number of sellers in an oligopoly grows

larger, an oligopolistic market looks more and

more like a competitive market.

The price approaches marginal cost, and thequantity produced approaches the socially

efficient level.


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The Kinked Demand Curve


D2

D1

MR2

MR1

Price

Quantity0 Q

P

ab

c

d

MC0

MC1


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AR1

MR1

AR2

MR2

Rival firms assumed to follow a price cut(making demand relatively inelastic)

but

firms are assumed not follow a priceincrease (making demand relativelyelastic)

Assumes the main aim ofthe firm is to maintainmarket share

Price

Output


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Assume we start out at P1 and Q1:

Will a firm benefit from raising price above P1?

Will it benefit from cutting price below P1?

Deriving the Kinked Demand Curve

Raising price above P1

Demand is relatively elastic

Firm loses market share

and some total revenue

Price

Output

P1

Q1

AR1

MR1


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Assume we start out at P1 and Q1:

Will a firm benefit from raising price above P1?

Will it benefit from cutting price below P1?

Deriving the Kinked Demand Curve

Raising price above P1

Demand is relatively elastic

Firm loses market share

and some total revenue

Reducing price below P1

Demand is relatively inelastic

Little gain in market share

other firms have followed suit

Total revenue may still fall

Price

Output

P1

Q1

AR1

MR1


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AR

MR

MC

Profit Maximisation?

If MC curve for the first cuts through the

discontinuity in the MR curve does this

mean that the firm is maximizing profits?

Price

Output


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PUBLIC POLICY TOWARDOLIGOPOLIES

Cooperation among oligopolists is undesirablefrom the standpoint of society as a whole

because it leads toproduction that is too low

andprices that are too high.

between monopoly and perfect competition

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