Imperfect competition.ppt

Imperfect competition Most markets fall between the two extremes of monopoly and perfect competition An imperfectly competitive firm would like to sell more at the going price faces a downward-sloping demand curve recognises its output price depends on the quantity of goods produced and sold Imperfect competition An oligopoly an industry with a few producers each recognising that its own price depends both on its own actions and those of its rivals. In an industry with monopolistic competition there are many sellers producing products that are close substitutes for one another each firm has only limited ability to influence its output price. Market structure The minimum efficient scale and market demand The minimum efficient scale (mes) is the output at which a firm’s long-run average cost curve stops falling. The size of the mes relative to market demand has a strong influence on market structure. Monopolistic competition Characteristics: many firms no barriers to entry product differentiation so the firm faces a downward-sloping demand curve The absence of entry barriers means that profits are competed away... Monopolistic competition (2) Firms end up in TANGENCY EQUILIBRIUM, making normal profits. Firms do not operate at minimum LAC. Price exceeds marginal cost. Unlike perfect competition, the firm here is eager to sell more at the going market price. Oligopoly A market with a few sellers. The essence of an oligopolistic industry is the need for each firm to consider how its own actions affect the decisions of its relatively few competitors. Oligopoly may be characterised by collusion or by non-co-operation. Collusion and cartels COLLUSION an explicit or implicit agreement between existing firms to avoid or limit competition with one another. CARTEL is a situation in which formal agreements between firms are legally permitted. e.g. OPEC Collusion is difficult if There are many firms in the industry The product is not standardised Demand and cost conditions are ch