Transcript Imperfect competition

Chapter 9
Market structure and imperfect
competition
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
9th Edition, McGraw-Hill, 2008
PowerPoint presentation by Alex Tackie and Damian Ward
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Most markets fall between the two extremes of
monopoly and perfect competition
• An imperfectly competitive firm
– would like to sell more at the going price
– faces a downward-sloping demand curve
– recognises its output price depends on the
quantity of goods produced and sold
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Imperfect competition
• An oligopoly
– an industry with few producers
– each recognising that its own price depends
both on its own actions and those of its
rivals.
• In an industry with monopolistic
competition
– there are many sellers producing products
that are close substitutes for one another
– each firm has only limited ability to influence
its output price.
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Market structure
Number Ability to Entry
Example
of firms affect
barriers
price
Perfect competition
Many
Nil
None
Fruit stall
Monopolistic competition
Many
Small
None
Corner shop
Oligopoly
Few
Medium
Some
Cars
Monopoly
One
Large
Huge
Post Office
Imperfect competition:
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The minimum efficient scale and market
demand (1)
• The minimum efficient scale (mes) is the output at
which a firm’s long-run average cost curve stops falling.
• The size of the mes relative to market demand has a
strong influence on market structure.
£
LAC2
LAC3
LAC1
D
Output
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The minimum efficient scale and market
demand (2)
• If mes is small then there are more likely to be a higher
number of firms.
• LAC_1 is like a perfectly competitive firm’s cost
function, LAC_2 seems to belong to an oligopolist and
LAC_3 seems to belong to a natural monopolist.
£
LAC2
LAC3
LAC1
D
Output
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Monopolistic competition
• Characteristics:
– many firms
– no barriers to entry
– product differentiation
• so the firm faces a downward-sloping demand curve
– The absence of entry barriers means that
profits are competed away...
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Monopolistic Competition (1)
MC
•
In the short run, monopolistically
competitve firm faces DD. Firm
P0
produces Q0 where MC=MR and
AC
gets Q0*(P0-AC0) super-normal
profit
•
The supernormal profits etracts
more firms in the long run. This
AC0
decreases the demand for the
incumbent firms.
•
MR
Q0
DD
DD’
The demand faced by an incumbent
firm shifts to DD’.
Çıktı
8
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Monopolistic competition (2)
• Firms end up in TANGENCY
MC
£
EQUILIBRIUM, making
normal profits.
AC
F
• Firms do not operate at
minimum LAC.
• Price exceeds marginal
P1=AC1
cost.
• Unlike perfect competition,
the firm here is eager to
MR
Q1
D
sell more at the going
market price.
Output
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Oligopoly
• A market with few sellers.
• The essence of an oligopolistic industry is
the need for each firm to consider how its
own actions affect the decisions of its
relatively few competitors.
• Oligopoly may be characterised by
collusion or by non-co-operation.
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Collusion and cartels
• COLLUSION
– an explicit or implicit agreement between
existing firms to avoid or limit competition with
one another.
• CARTEL
– is a situation in which formal agreements
between firms are legally permitted.
• e.g. OPEC
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Collusion is difficult if
• There are many firms in the industry
• The product is not standardised
• Demand and cost conditions are
changing rapidly
• There are no barriers to entry
• Firms have surplus capacity
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Game theory:
some key terms
• Game
– a situation in which intelligent decisions are
necessarily interdependent.
• Strategy
– a game plan describing how the player will act
or move in every conceivable situation.
• Dominant strategy
– where a player’s best strategy is independent
of those chosen by others.
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The Prisoners’ Dilemma Game
Consider two firms in a duopoly each with a choice of producing
‘high’ or ‘low’ output:
Firm B output
Firm A output
High
Low
High
1
1
3
0
Low
0
3
2
2
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The Prisoners’ Dilemma
• Each firm has a dominant strategy to
produce high
• so they make 1 unit profit each
• but they would both be better off
producing low
– as long as they can be sure that the other
firm also produces low.
• So collusion can bring mutual benefits
• but there is incentive for each firm to
cheat.
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More on collusion
• The probability of cheating may be
affected by agreement or threats.
• Pre-commitment
– an arrangement, entered voluntarily,
restricting future options.
• Credible threat
– a threat which, after the fact, is optimal to
carry out.
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Strategic entry deterrence
• Some entry barriers are deliberately
erected by incumbent firms:
–
–
–
–
threat of predatory pricing
spare capacity
advertising and R&D
product proliferation
• Actions that enforce sunk costs on
potential entrants
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Summary….
• The polar extremes of perfect competition
and monopoly are rarely encountered in
practice.
• Imperfect competition is more the norm.
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Summary (cont.)
• Potential competition can have an impact
on the behaviour of incumbent firms.
• Many business practices can be
rationalised as strategic competition.
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