Lecture 13

Principles of Microeconomics: ECO 101

Imperfect Competition and Monopoly
Sumaiya Nabi Khan
PATTERNS OF IMPERFECT COMPETITION
Recall that a perfectly competitive market is one in which no firm is large enough to
affect the market price. In reality, Some of the firms in the industry can affect the market
price by changing the quantity they sell. To put it another way, they have some control
over the price of their output.

If a firm can affect the market price of its output, the firm is classified as an imperfect
competitor.

Imperfect competition prevails in an industry whenever individual sellers can affect the
price of their output. The major kinds of imperfect competition are monopoly, oligopoly,
and monopolistic competition.
Monopoly
At one pole of the competitive spectrum is the perfect competitor, which is one firm
among a vast multitude of firms. At the other pole is the monopoly, which is a single seller
with complete control over an industry.

(The word comes from the Greek words mono for “one” and polist for “seller.”) A
monopolist is the only firm producing in its industry, and there is no industry producing a
close substitute.

Moreover, for now we assume that the monopolist must sell everything at the same price
—there is no price discrimination.
Monopoly Contd.
True monopolies are rare today. Most monopolies persist because of some form of
government regulation or protection.

For example, a pharmaceutical company that discovers a new wonder drug may be
granted a patent, which gives it monopoly control over that drug for a number of years.

Another important example of monopoly is a franchised local utility, such as the firm
that provides your household water. In such cases there is truly a single seller of a service
with no close substitutes.
Oligopoly
The term oligopoly means “few sellers.” Few, in this context, can be a number as small
as 2 or as large as 10 or 15 firms.

The important feature of oligopoly is that each individual firm can affect the market
price.

In the airline industry, the decision of a single airline to lower fares can set off a price
war which brings down the fares charged by all its competitors.
Oligopoly Contd.
Oligopolistic industries are common in the U.S. economy, especially in the
manufacturing, transportation, and communications sectors. For example, there are only a
few car makers, even though the automobile industry sells many different models.

The same is true in the market for household appliances: stores are filled with many
different models of refrigerators and dishwashers, all made by a handful of companies.
Monopolistic Competition
The final category we examine is monopolistic competition . In this situation, a large
number of sellers produce differentiated products.

This market structure resembles perfect competition in that there are many sellers, none
of whom has a large share of the market.

It differs from perfect competition in that the products sold by different firms are not
identical. Differentiated products are ones whose important characteristics vary. Personal
computers, for example, have differing characteristics such as speed, memory, hard disk,
modem, size, and weight.
Because computers are differentiated, they can sell at slightly different prices.
Demand curve faced by a monopolist firm
A monopolist is the sole producer of the product that it sells. Therefore the demand curve
that it faces is simply the market demand curve for that product.

The market demand curve, which shows the total quantity that buyers want to purchase
at each price, also shows the quantity that the monopolist will be able to sell at each price.

Unlike a perfectly competitive firm, a monopolist faces a negatively sloped demand

curve.
Profit Maximization Problem
The following table shows the demand
Price Quantity sold (Q)
curve that a monopolist firm is facing who
(Average Revenue)
produces at a constant marginal cost of Taka
18 0
8. That is MC = 8.
16 4
14 8
12 12 1. Calculate the total revenue and its
10 16 marginal revenue.
8 20 2. From your calculation, draw the demand
6 24 curve and the marginal revenue curve.
4 28 3. What is the profit maximizing output
2 32 level and price?
0 36