General Notes for Imperfect Competition

Ashley Hay
Note by Ashley Hay, updated more than 1 year ago
Ashley Hay
Created by Ashley Hay about 4 years ago
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Monopolies, Monopolistic Competition, and Oligopolies

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Page 1

Monopoly

MONOPOLY: a competitive structure where there is only 1 seller of a particular product with no close substitutes Monopolists are price-searchers. The demand curve is downward sloping, so they must lower price to sell additional units. Elasticity of Demand:-When marginal revenue is positive, demand curve is elastic. It's positive to the left of the demand line where MR crosses with the x axis (vertical line upwards)-Monopolists will always choose to produce in the elastic portion of the demand curve because producing higher quantities would reduce TR while adding to TCProblems with Monopolies: In order to maximize profits, monopolists end up producing less output and charging a higher price than a competitive market would. By charging more and producing less, monopolists takes away consumer and producer surplus - this is called dead weight loss. Monopolists aren't efficient! They fail to achieve productive efficiency by not producing at minimum ATC, and allocative efficiency by not charging a price equal to MC.

Because of inefficiency, the government may regulate monopolies by forcing them to produce more and charge less. Social Optimum: P = MC Fair Return: P = ATC (zero economic profit)

Page 2

Monopolistic Competition

NOTE: In monopolistic competition, the demand curve (AR) is more elastic due to the presence of substitutes!In the long run, economic profits cause new firms to enter the market. This causes... The demand curve of existing profits to shift left (aka the substitute effect) Zero Economic Profit occurs (when ATC = AR at the quantity being produced) HOWEVER, even in the long run, the firm is still sort of inefficient because price (P) does not equal MC and the firm doesn't produce at minimum ATC. This is known as allocative inefficiency.

Page 3

Oligopoly: Game Theory

-Game Theory analyzes the behavior of oligopolies GAME THEORY: firms take actions based on what they anticipate their rival will do uses a Payoff Matrix to analyze/predict the actions of players -A dominant strategy is one that a firm will definitely follow because it yields the highest benefit regardless of whatever the competition does-Nash Equilibrium: a position in which neither player could be made better off by changing their position (assuming the other doesn't change either)essentially, it's the one box of the Payoff Matrix that should happen

In the Payoff Matrix above... Yellow's dominant strategy is a high output White's dominant strategy is also a high output So, the Nash Equilibrium exists in the bottom right hand corner, with both outputs being high, and both firms making $100 million. This is because neither could be better off choosing an option other than high, so no matter what happens, that box should be the production.

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