Characteristics of perfect competition
- many small firms (thousands)
- identical products
- price takers
- no need to advertise
- very low barriers to entry
Characteristics of monopolistic competition
- large number of sellers (hundreds)
- differentiated products
- price maker
- lots of ads
- low barriers to entry
Characteristics of oligopolies
- few large producers (less than 10)
- either identical or different products
- high barriers to entry
- price maker
- uses strategic pricing
Characteristics of monopolies
- one large firm
- very little advertising
- unique product with no close substitutes
- impossibly high barriers to entry
- price makers
why is demand greater than marginal revenue for all imperfectly competitive firms?
since price discrimination is not allowed, the additional revenue received for each product will be less because of it have to drop the price for those willing to pay more
why are monopolies inefficient (3 reasons)
- they charge higher prices
- they don’t produce enough (not allocatively efficiently)
- they produce at higher costs (not productively efficient)
elastic vs inelastic range for monopolies
elastic range is the section of the graph where MR is positive and the inelastic range is where MR is negative
monopolies only produce in the elastic range
Total revenue peaks when MR=0
What are four common barriers that allow companies to gain and maintain market power?
- economies of scale
- high start up costs
- ownership of raw materials
- technological superiority
what is a natural monopoly?
natural monopolies are legal monopolies; exists because sometimes it’s more efficient for only one firm to produce because they can produce at the lowest cost. (ex. water companies)
Monopoly regulation:
identify unregulated, socially optimal, and fair return points
- unregulated point is where MR=MC
- fair return point is where ATC=D
- socially optimal point is where supply equals demand (aka MC=D)
how can governments regulate monopolies?
Price ceilings; the government can either set price ceiling at the socially optimal price (the price society wants) or at the fair return price (where the firm breaks even)
taxes don’t work to regulate monopolies because it will decrease supply and increase price making things worse
price discrimination
selling the same product to different people for different prices
what three conditions must a firm meet in order to price discriminate?
- must be a price maker
- must be able to segregate the market
- consumers can’t resell
perfectly price discriminating monopolies
- MR equals the demand curve (disappears on graph)
- no DWL (allocatively efficient)
- 100% producer surplus, 0% consumer surplus
- no price point because everyone is paying a different price
why don’t perfectly price discriminating monopolies have dead weight loss?
Because since the firm is charging each consumer the maximum amount they are willing and able to pay for the product, the supply of the product is equal to the demand of the produce and all surplus is maximized.
Long run monopolistic competition graph
- breaking even
- ATC curve hits demand curve then continues sloping downward until it hits the MC curve
- Excess capacity is represented by the distance between the normal quantity and the quantity at ATCs lowest point
Excess capacity
given the current resources, the firm could produce at the lowest costs (productively efficient) but they choose not to
non price competition
- brand names and packaging
- advertising
- customer service
- product quality
what are the two goals of advertising?
- increase demand
- make demand more inelastic
nash equilibrium
the optimal outcome that occurs when all firms make decisions simultaneously and have no incentive to change (colluding oligopoly)
Dominant strategy
the best move to make regardless of what your opponent does
colluding oligopoly
- cartel: group of producers that create an agreement to fix prices high
- cartels set price and output at an agreed upon level
- firms require identical or highly similar demand and costs
- must have a way to punish cheaters (pablo escobar)
- acts as a monopoly (monopoly graph)
non colluding oligopoly
- react to competitor price change in one of two ways:
- match price (inelastic demand)
- ignore price (elastic demand)
graph is linked demand curve
price leadership oligopoly
a strategy used by oligopolistic firms to coordinate prices without outright collusion
general process: dominant firm initiated a price change and other firms follow
