Imperfect Competition Flashcards
Oligopoly
- Small number of firms, some barriers to entry, unique products (e.g: crude oil, tobacco)
- Some economies of scale
- Game theory (duopoly)
- Profits not only depend on the decisions (price) of the firm, but also on the decision (prices) of the competitors
Tying arrangements: agreement to sell one product only if buyer agrees to buy another, different product, e.g., Microsoft has been accused of tying Internet Explorer & Windows
Predatory pricing: setting a low price to drive competitors out of business with intention to then set price to monopoly price when competition is gone (e.g. Uber?)
Monopoly
- Only one firm
- No close substitutes and high barriers to entry
- Is able to manipulate the price
- MC = Supply Curve
- Because there is no market competition, monopoly can maintain profit levels by controlling supply at level where MC = MR, thus controlling the price
Perfect Competition Vs Monopoly
How can monopolies occur?
1) Exclusive control - only one firm as access to the inputs needed to make product
2) Natural monopoly - b/c of economies of scale, the market may be best served by having only one firm because production costs increase when there are more
3) Patents and licenses - inventions are patented so that others can’t produce the same thing and licenses are given that limit the use of a particular resource or area
How is it possible for monopolies to have profit and welfare loss?
Monopolistic competition
- Many suppliers, many buyers and a heterogenous/differentiated product (e.g: clothes)
- Market behavior of 1 firm does not have any influence on the total market
- Firms have more or less identical cost structures (identical cost curves)
- Firms are able to manipulate their prices
- In the long run the entry of firms decreases profits to 0
welfare loss in the end
Benefits: Innovation, Choice, Stimuli to lower costs
Disadvantages: money spent on advertising
