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Imperfect competition and output decision

Presented by : Ananya sengupta Deepak nanda Kush rai

Imperfect Market
Imperfect competition is a market

situation where individual firms have a measure of control over the price of the commodity in an industry. a firm that can affect the market price of its output can be classified as an imperfect competitor. Normally, imperfect competition arises when an industry's output is supplied only by one, or a relatively small number of firms.

Imperfect Market An imperfect market is a situation where individual firms have some measure of control or discretion over the price of the commodity in an industry  This imperfect competition does not necessarily mean that a firm can arbitrarily put any price on its commodity  an imperfect competitor does not have absolute power over price Aside from discretion over price. imperfect  competitors may or may not have product differentiation/variation .

the firm faces a downward sloping demand curve This implies that if the firm wants to sell more. . it should lower the price. In either case. faces a horizontal demand curve. if it wishes a higher price. In contrast. since it has no control over price. he should restrict output.Demand curve faced by firm The firm under an imperfect market faces the market demand curve or part of it. a perfectly competitive firm.

. This may be traced to the existence of barriers to entry and the existence of significant differences or advantages in cost conditions.Sources of market imperfection Imperfect competition often arises when an industry’s output is supplied by one or a small number of firms.

.Sources of market imperfection Imperfect competition often arises when an industry’s output is supplied by one or a small number of firms. This may be traced to the existence of barriers to entry and the existence of significant differences or advantages in cost conditions.

Barriers to Entry Barriers to entry – natural or artificial legal restrictions like patents and constraints that prevent other firms from entering the industry exclusive franchises. firm’s production function may exhibit increasing returns to scale (LAC curve shows economies of scale over all profitable output levels). . existence of advantages in cost conditions – demand for commodity may be too small.

2 .P MC Price k AC D Q 0 Quantity FIGURE 7 . A natural monopoly arises when increasing returns to scale (decreasing average cost) makes most efficient plant size (at point k) large relative to market demand. . the market can only support one firm in the industry. In this case. In the region of increasing returns. the marginal cost lies below the average cost. Marginal cost and average cost curves of a firm in a natural monopoly relative to market demand .

..  firms operating in an oligopolistic market situation Oligopoly – market structure with few sellers. cement and automobile industries.g.Imperfect Markets Monopoly – market situation where a single seller exists and has complete control over an industry  e.g. Meralco is sole distributor of electric power in Metro Manila  e. may either collude or act independently Monopolistic competition – occurs when there are many sellers producing differentiated products  firms have slight control over the price of the commodity and they advertise .

•T h e re a re fe w b a rri rs to e n try. e .Monopolistic competition Monopolistic competition is a market structure in which there are many firms selling differentiated products.

but these methods of competition follow the same two decision rules as price competition 4.Ease of entry of new firms in the long run because there are no significant barriers to entry 16 .11 .*Multiple dimensions of competition make it harder to analyze a specific industry.Monopolistic Competition  Four distinguishing characteristics: 1.Product differentiation where the goods that are sold aren’t homogenous 3.Many sellers that do not take into account rivals’ reactions 2.

But the monopolistic competitor is not only a monopolist but a competitor as well. Price.Output. and Profit of a Monopolistic Competitor A monopolistically competitive firm prices in the same manner as a monopolist—where MC = MR. .

.Output. Price. ATC equals price and economic profits are zero. and Profit of a Monopolistic Competitor At equilibrium. •This occurs at the point of tangency of the ATC and demand curve at the output chosen by the firm.

Price Monopolistic Competition MC ATC PM MR 0 QM D Quantity .

A Monopolistically Competitive Firm: Above Normal Profit .

A Monopolistically Competitive Firm: Economic Loss .

A Monopolistically Competitive Firm: Normal Profit .

Entry and Normal Profit .

Oligopoly Competition between the few May be a large number of firms in the industry but the industry is dominated by a small number of very large producers Concentration Ratio – the proportion of total market sales (share) held by the top 3.5.4. etc firms: A 4 firm concentration ratio of 75% means the top 4 firms account for 75% of all the sales in the industry  .

html . Market Share of the Music Industry 2002.ifpi.Oligopoly Example: Music sales – The music industry has a 5-firm concentration ratio of 75%. Independents make up 25% of the market but there could be many thousands of firms that make up this ‘independents’ group. An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large Source IFPI: http://www.

Oligopoly Features of an oligopolistic market structure: Price may be relatively stable across the industry – kinked demand curve? Potential for collusion Behaviour of firms affected by what they believe their rivals might do – interdependence of firms Goods could be homogenous or highly differentiated  .

Branding and brand loyalty may be a potent source of competitive advantage Non-price competition may be prevalent Game theory can be used to explain some behaviour AC curve may be saucer shaped – minimum efficient scale could occur over large range of output .

reduction in price – total revenue curve for its product (consumers would would again fall asits price.Price O lg o p o l i y The kinked demand curve .If a firm lowers the firm now faces buy from the cheaper rivals). effectively faces IfThe principle of is charging demand Assume the firm to lower its price to of the firm seeks the kinked a price a ‘kinked demand curve’ forcing it gain acurve rests an output of its to £5 andcompetitiveon the principle rivals producing advantage. maintain stable or rigid it makes will followasuit. its rivals overcome this smaller than the % demand will beby engaging in noneffectivelynot follow elastic demand will faces an suit price competition. 100. Any gains pricing will that: If it chose to raise price above £ explanation for price stability? The firm therefore. £5 Total Revenue B Total e ve n u e To ta l R Revenue A Total Revenue B Kinked D Curve D = Inelastic 100 D = elastic Quantity . its structure. change in demand would be greater than the % change in price and TR would fall. its rivals b. lost and the % change quickly beOligopolistic firms may in rivalsawould not follow suit and the firm a.If firm raises its price. The % a relatively inelastic same will all do the demand curve.

Duopoly Market structure where the industry is dominated by two large producers Collusion may be a possible feature Price leadership by the larger of the two firms may exist – the smaller firm follows the price lead of the larger one Highly interdependent .

local duopolies may exist  .High barriers to entry Cournot Model – French economist – analysed duopoly – suggested long run equilibrium would see equal market share and normal profit made In reality.