6.1. Imperfect Competition Flashcards
Monopolistic competition
Goods produced by different firms are differentiated - not perfect substitutes.
Increasing the price above that of a competititors does not caused demand to fall.
Monopolistically competitive firms compete with other firms, with each firm having some control over the selling price of their goods (not as much as monopolists).
Increasing returns to scale: average cost of production decreases as the firm increases its output.
Monopolist
A single firm controls the entire market for a specific good.
The firm has perfect control over the market price of the good.
MR=MC, leads to profit maximising quantity.
Corresponding price is found through the inverse demand function.
Monopolistic / extraordinary profit is generated.
Duopolist
Two firms control the entire market for a specific good.
The demand faced by each firm is affected by the price charged by the other firm.
Duopolist demand and prices
Where both firms charge the same price, the demand curve facing the firms is D/2.
If both firms charge P1, then industry demand is at point A and demand facing the individual firms is at point B.
If one firm changes its price in a market of identical goods, the firm lowering the price gets all the demand.
If the products are slightly differentiated, perhaps through quality, people will stay and buy the other product.
The firm who lowered the prices does take some of the demand from the firm who kept the price constnat, but not as much, in case of differentiation.
