Transcript Eco 9/2

Eco 9/2
Monopoly, Oligopoly,
Monopolistic
Competition
Imperfect Competition
 Most industries represent
imperfect competition.
1. Monopoly
2. Oligopoly
3. Monopolistic competition
They differ on the basis of how
much competition and control
over price the seller has.
Monopoly
Pure monopoly: most extreme
form of imperfect competition. (Georgia
Power)
Characteristics of a Monopoly
1. A single seller
2. No substitutes
3. No entry (The monopolist is protected
by obstacles to competition that prevent
others from entering the market.)
4. Almost complete control of
market price.
Barriers to Entry
 State laws prevent entry. Competing
electric, water companies are prevented
by law from entering the market.
 High cost of getting started.
“Excessive financial capital costs”
 Ownership of essential raw materials.
(DeBeers Company owns diamond
mines in South Africa.)
Types of Monopolies
 Natural monopolies
 Geographic monopolies
 Technological monopolies
 Government monopolies
Natural Monopolies
 One company provides a public good or
service- buses, utilities, cable tv.
It was thought one company would be
more efficient through economies of
scale. Gov’t is breaking them up through
deregulation.
Economies of scale: low production
costs resulting from large size of output.
Geographic Monopoly
 Geographic factors prevent competition.
(General store in a remote Alaskan village)
Technological Monopoly
 A gov’t
patent gives you exclusive right
to manufacture, sell, rent your invention
for # of years, usually 20.
 A copyright protects art, literature,
song lyrics, other creative works for life
of the author + 70 years.
Government Monopoly
 Construction, maintenance of roads and
bridges are responsibility of gov’t.
Oligopoly
 Industry dominated by several suppliers
who exercise some control over price.
(Tobacco products, breakfast cereals,
domestic motor vehicles, soft drinks)
Five Condition of an Oligopoly
1. Dominated by a few sellers
2. Barriers to entry- capital costs are high,
hard to enter major markets.
3. Identical or slightly different products
4. Nonprice competition- advertising
emphasizes minor differences
5. Interdependence- any change in one
firm will change others in the oligopoly
Product Differentiation
 Real or perceived differences in good or
service that make it more valuable in
consumers’ eyes.
Interdependent Behavior
 Whatever one firm does, others follow.
 If one airline lowers prices, all others will
and it will ignite a price war.
 Collusion- competing firms in an
oligopoly secretly agree to raise prices or
divide the market. (Federal crime)
Cartels
 Form of collusion.
 Cartel- an arrangement among groups
of industrial businesses, often in different
countries, to reduce international
competition by controlling price,
production, distribution.
Monopolistic Competition
 Large number of sellers offer similar but
slightly different products. (toothpaste,
cosmetics, designer clothes)
 Most common form of market structure
in the U.S.
Five Conditions of
Monopolistic Competition
1. Numerous sellers
2. Relatively easy entry. (Easier than in
a monopoly or oligopoly. Advertising is
costly.)
3. Differentiated products- each seller
sells slightly different product.
4. Nonprice competition
5. Some control over price
Oligopoly vs.
Monopolistic Competition
Oligopoly: few companies
control an industry.
Monopolistic competition:
many firms, no real
interdependence, some slight
differences between products.
Advertising
 Even more important in monopolistic
competition than in oligopolies.