Imperfect Competition

Question 1

what are the assumptions/ characteristics of imperfect competition?

Answer 1

there are many buyers in the industry,
there are many sellers,
product differentiation exists,
freedom of entry and exit,
reasonable knowledge,
profit- maximizing firms

Question 2

in what ways can product differentiation work?

Answer 2

physical product differentiation,
Marketing differentiation,
human capital differentiation,
differentiation through distribution,

Question 3

describe the demand curves facing a monopolistic/ imperfectly competitive firm

Answer 3

Because each firm makes unique product, it can charge a higher/lower price than its rivals

inverse relationship between price and Q demanded,
downward sloping demand curve and consequently a MR curve lower than it

Question 4

what does successful product differentiation includes?

Answer 4

a more inelastic demand curve

Question 5

describe the graph of imperfect competition in the short run!

Answer 5

SNP is earned ( AR bigger than AC)
Price/ output at point P, Q
Equilibrium and point E where MC = MR
Costs ant point C
Scarce resources are wasted, firm is not producing at the lowest point of AC (A)

Question 6

describe the graph of imperfect competition in the long run!

Answer 6

SNP is not earned (AR = AC)
Price/ output at Q and P
Equilibrium at point E where MC = MR
Cost at C 
Scarce resources wasted, since they are not producing on the lowest point of AC (A)

Question 7

what are the advantages of imperfect competition ?

Answer 7

• contestable markets: anyone can enter the industry at anytime
• choice of goods : people are alway competing
• dynamically efficient : they are innovative
• normal profit : no advantage
• access to information: for consumers

Question 8

what are the disadvantages of imperfect competition ?

Answer 8

• production is not at the minimum point of AC
• excess capacity
• price is greater than MC

Question 9

compare imperfect competition with perfect competition!

Answer 9

both earn normal profit where AC = AR in the long run,
the perfectly competitive firms use all their scarce resources as they produce at the AC curve lowest point - the imperfectly competitive firms don’t
P = MC in perfect competition, but greater than MC in imperfect competition
the perfectly competitive firm faces a horizontal demand curve and the imperfectly competitive firm faces a downward sloping demand curve

Question 10

define price competition !

Answer 10

where firms compete by changing their prices.

Question 11

define non-price competition!

Answer 11

where firms compete using methods other than changing their prices

e.g. giveaways, competitions, club points

Question 12

why do consumers mostly prefer price competition rather than non.price competition ?

Answer 12

the buyer gets the good at the lowest price,

the consumer has more disposable income,

the consumer now has a choice - they can decide what to do with their income, e.g. buy more goods and get greater utility from the same income than previously

Question 13

what are benefits of non-price competition to consumers?

Answer 13

there are better after-sale services,

they might get free gifts, home delivery, internet shopping,…

advertising keeps them informed af special offers,…