Chapter 9: Imperfect Competition & Monopolies

Question 1

Where does imperfect competition prevail?

Answer 1

Imperfect competition prevails in an industry whenever individual sellers have some measure of control over the price of their output.

Question 2

What are the types of imperfect competitors?

Answer 2

• Monopoly
• Oligopoly
• Monopolistic competition

Question 3

Monopoly:

Answer 3

A single seller with complete control over an industry. However, in the long run, no monopolist is completely secure from attack by competitors. (e.g. patens on drugs, utilities etc.)

Question 4

Oligopoly:

Answer 4

Each individual firm can affect the market price; „few sellers“ – can be 2 or 10 to 15 firms. (e.g. communications sector, carmakers etc.)

Question 5

Monopolistic competition:

Answer 5

A large number of sellers produce differentiated products.
But: products are not identical – the important characteristics vary! Hence, they can sell at slightly different prices.
(e.g. Gasoline retailers (the total opportunity costs (including time) will depend upon the location etc. → also the reason for popularity of shopping malls)
Quality is also an increasingly important part of product differentiation today (computer).

Question 6

Perfect competition:

Answer 6

A large amount of sellers that offer identical products (agricultural products for instance)

Question 7

Why do big firms have a cost advantage in comparison to smaller ones?

Answer 7

Bigger firms can take advantage of economies of scale, whilst the smaller ones cannot. Therefore, bigger firms have a cost advantage over the smaller ones.

Question 8

Barriers to entry:

Answer 8

Factors that make it hard for new firms to enter an industry.

Question 9

Common types of barriers to entry:

Answer 9

Economies of scale
Legal restrictions → patents: allow temporary exclusive use of the product or process (e.g. pharmaceutical companies), foreign trade tariffs and quotas, entry restrictions

High cost of entry → high cost of design and test (e.g. aircraft’s), intangible forms of investment (e.g. software industry) – all these serves to discourage potential entrants into the market

Advertising and product differentiation → advertising can create product awareness and loyalty to well-known brands, e.g. Coca-Cola and Pepsi; product differentiation can impose a barrier to entry and increase the market power of producers, e.g. breakfast cereals

Question 10

Marginal revenue:

Answer 10

Marginal revenue is the change in revenue that is generated by an additional unit of sales.

Question 11

How can a business maximize its profits?

Answer 11

A business can maximize its profits by finding the price in which the marginal revenue becomes 0.