Perfect Competition,

Monopoly, and
Oligopoly market
A summary regarding Perfect Competition,
Monopoly, and Oligopoly market
Perfect Many buyers and sellers
Competitive Goods are identical (homogenous)
Markets Firms can freely enter and exit the

Key Characteristics:
market

No single firm can exert price

control in the market. All firms
are price takers.
Profit Maximizing in If MR > MC:
Increase profits
Perfect Competitive by producing
more
Firms will maximize their profits by producing at
the point where:

MR = MC If MR < MC:
Increase profits
by producing less
NOTE: Marginal Revenue is constant and equal to
price ONLY under perfect competition.
 Resource
Monopoly Restrictions

Market Gov’t
created
Fundamental Causes of Monopolies
Monopoly. Barriers to Entry
Natural
cause Monopoly Power:
Monopolies
Pricing and
Monopoly firm
Production
Monopoly firm – still faces a
Decisions in downward sloping

Monopoly demand curve

Price &
A monopoly firm has Quantity
complete price control Price: determined
because they are the sole by the firm
provider of the good.
Mazimizing Quantity:
To sell more = must determined by
Considered a Price Maker lower the price demand
 Increase competition with Antitrust Laws
Ways to Regulate natural monopolies to bring the
price as close to a socially efficient point as
Regulate possible
Public Ownership --> Government takes
Monopoly over.
Power Do nothing: Cost to regulation > Benefit of
regulating.
 Monopolies are the least competitive market structure
Important but they still
Points about depend on demand to set prices and profit-maximizing
quantities
Monopoly There are social costs to monopoly power, including

Market deadweight loss

There are many harmless and harmful examples of
monopoly power
in the world today.
Oligopoly Firms must act
strategically
Market
How much it
Few sellers, selling identical
produces
goods.
Because few sellers, the How much
production choices of one all other
firm will affect the outcomes firms
of all other firms in the produce Tension
market between
cooperatio
n and self-
interest
Oligopoly and Game
Theory
Oligopoly: the best outcome is to cooperate and
act as a monopoly
An incentive to act in own self-interest
To reach the monopoly outcome – each firm relies
on the other (interdependent)
 If cooperate: reach monopoly
outcome
P = 60, Q = 60, Profit = 3600
Jack Profits --> P = 60, Q = 30, Profit = 1800
Jill Profits --> P = 60, Q = 30, Profit = 1800

If one cheats: can gain more

P = 50, Q = 70, Profit = 3500
Cheater --> P = 50, Q = 40, Profit = 2000
Cooperator --> P = 50, Q = 30, Profit = 1500

Oligopoly
If both cheat: lower profits but
Outcome oligopoly outcome
P = 40, Q = 80, Profits = 3200
Jack Profits --> P = 40, Q = 40, Profits = 1600
Jill Profits --> P = 40, Q = 40, Profits = 1600
 When there are only a few firms in a market – each firm
Important acts strategically
Points about Game theory – guides the strategies that firms choose
Will act in their own self-interest despite the potential
Oligopoly to gain when cooperate
Market Cooperation is possible in repetitive games when the
rules don’t change
Thanks!
Muhammad Zaki Mubarak
2001101010053