Imperfect Competition

Imperfect Competition - Imperfect Competition Monopolistic...

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Imperfect Competition Monopolistic Competition & Oligopoly
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Structure Monopolistic Competition Large number of small firms Differentiated Product No entry barriers Oligopoly A “Few” large firms Undifferentiated or differentiated product Significant Entry Barriers
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Monopolistic Competition Because the product is differentiated, each firm has control over price. But because there are lots of close substitutes each firm faces a relatively elastic demand curve.
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Monopolistic Competition Moreover, no firm is big enough to influence the rest of the market. And collusion amongst the firms is not possible. The result is that the firms don’t have much market power.
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Lerner Index of Market Power D E 1 P MC P L P MC P L = - = - =
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D D MR Q Q $ $ MC MC Q* Q* P MC P MC (Markup of price over cost is greater for monopolist). MONOPOLISTIC COMPETITION MONOPOLY
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Long-Run Equilibrium No entry barriers means that profits are driven to zero in long-run. But since the product is differentiated: P > MC ATC is not minimized (“excess capacity”)
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Because there are “few” firms in the market, each can influence the market. And collusion is possible:
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Imperfect Competition - Imperfect Competition Monopolistic...

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