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Perfect Competition
Many sellers and buyers. Therefore one can not make
any impact on price. Then the industrys demand curve is
fatter (horizontal). All the producers are price takers not the
Makers.
Produce homogeneous or identical goods.
Elastic demand - price takers.
All firms have identical costs.
Perfect mobility
Free entry and exit.
No transaction costs (e.g. transport, distribution).
Perfect information
Profits maximising
Condition: MR = MC
(MR = MC = P = AR)
P, C
SRMC
B
P1
P2
o
A
Q Q1
SRTC
SRVC
MR=P
MR=P
Output
P, C
Figure 2
LRMC
LRAC
Q
0
Industry supply curve
Q1
Summation of the individual supply curve is the market supply
curve. Shapes are different in two period supply curves: SR
steep and LR flatter
Marginal Firm
Highest cost producer in the industry but can remain in the
industry in the long run. In some text book says it is the last
LRM
firm to enter the industry
C
LRMC
Figure 3
LRAC
LRAC
LRAC
LRSS
MR
AR
TR
TR
Q
q*
MC
Price
AC
P1
Marginal condition:
MR>MC, Q Goes up
MR = MC, Q Optimal
MR<MC, Q Goes down
Average condition
Short-run
P>SAVC, produce
P<SAVC, shut-down
Long-run
P>LAC, stay
P<LAC, exist
P
AR
0
Output
MR
MC
AC
K
AR
Q1
M
R
Q0
MR1
AR1
MR
Oligopoly
Small number of large suppliers in the industry each can have
influence on the market. Barriers exist for free entry and exist (Ex: air
lines).
Each firms price and output decision is influenced by
perceptions of rivals countermoves. Interdependence is the key
feature in oligopoly. Sticky prices and non-price competition also can
be seen in this market structure.
Competition and collusion both relevant to oligopoly.
Collusion: explicit or implicit agreement between existing firms
to avoid competition with each other. Collusion increases joint
profits but reduces output.
Collusion is harder if there are many firms in the industry, product is
non standards and demand and cost conditions are changed rapidly.
Non collusive oligopoly take independent decisions on price and
quantity looking at the reactions of competitors. Competition increase
profits and market share in expense of rivals.
Cartels: Legal or other forms of agreements between firms or countries
for collusion and cooperation on prices or output.
A
P0
MC
MR
DD
0
Q0
MR
Oligopolists demand
curve kinked at A. Price
rises lead to a large
loss of market share, but price
cuts increase quantity only
by increasing industry sales.
MR is discontinuous at Q0.
Produces Q0 at the point
MR=MC
Qd
Industry Structure :
The Competitive Spectrum
Number of Suppliers
PERFECT COMPETITION
MONOPOLISTIC COMPETITION
OLIGOPOLY
MONOPOLY
Barriers to entry/exit
Number of differentiated products
Identifying Structure :
Market Concentration
Market concentration refers to the extent to which the supply of
a good or service is controlled by the leading suppliers of the
product
Commonly used measures :
Windows
3.X, 95, 98
97%
Source : Mintel
Procter &
Gamble
45%
Unilever
44%
Pioneer
Marantz
Kenwood
Rotel
Audio Lab
Linn
Arcam
Quad
Nalm
Akai
Denon
Others
Sony
Mission
Technics
AND
Dell
13%
Other
58%
IBM
7%
NEC
4%
Price
MC
AC
MR=AR
Output
Price
MR=AR
Output
Price
AC
P
MR=AR
P*
Q*
Output
Price
Monopoly : Structure
MC
AC
AR
0
Q
MR
Output
Price
Monopoly :
Conduct
MC
AC
C
0
AR
Q
Output
MR
Monopolist maximizes profit at output Q, where MC=MR.
Charges price P (from the demand curve i.e. AR).
Produces Q at cost C per unit (from AC curve).
Makes (P-C)*Q profit in the short run. But barriers to entry...
Monopoly : Performance
MC
AC
P
C
AR
0
Q
MR
Output
Many suppliers
Some product
differentiation individual firm faces
elastic demand curve
-price makers
Free entry and exit
Perfect information
Identical costs
No transaction costs
Price
MC
AC
AR
0
Q
MR
Output
Price
Monopolistic
Competition :
Conduct
MC
AC
C
0
AR
Q
MR
Output
Price
Price
MC
MC
AC
AC
P*
AR1
AR2
Output
AR2
0
Q*
MR2
Output
Price
Oligopoly : Structure
MC
AR
0
Q
MR
Output
Oligopoly : Conduct
non-cooperative behaviour
tacit collusion (kinked demand curve)
collusive behaviour - e.g. cartels
Against monopoly :
not allocatively efficient
lack of competition may hinder productive efficiency
For monopoly :
dynamic v. static efficiency
the possibility of innovatory behaviour and technical
change
natural monopolies
relaxation of assumptions - cost structures,
differential transaction costs and imperfect
information
Competition Policy
Belief that monopoly (and oligopoly) can lead to
net welfare loss is basis of competition policy
Anti-trust authorities, including the Competition
Commission in the UK, regulate competition
Main concern is to protect consumers and
society from abuse of monopoly power through
regulating: