1 Part 5 ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Types of Imperfectly Competitive Markets Types of Imperfectly Competitive Markets Monopolistic Competition, Characteristics Monopolistic Competition, Characteristics Firm‘s Demand Firm‘s Demand Short-run Period – Profit, Loss Short-run Period – Profit, Loss Long-Run Equilibrium Long-Run Equilibrium Monopolistic competition vs. perfect competition Monopolistic competition vs. perfect competition Oligopoly, Characteristics Oligopoly, Characteristics Game Theory Game Theory Noncooperative and Cooperative Games Noncooperative and Cooperative Games Prisoners‘ Dilemma Prisoners‘ Dilemma Monopoly Market, Characteristics Monopoly Market, Characteristics Profit & Loss Profit & Loss Lerner Index Lerner Index

2 Imperfectly Competitive Market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union 4 types of market structure 1. Perfect Competition 2. Monopolistic Competition 4. Monopoly 3. Oligopoly many firms, homogeneous product many firms, differentiated product few firms, similar or identical product one firm

3 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union

4 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics 1. Many sellers There are many firms competing for the same group of customers

5 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics 2. Product differentiation Each firm produces a product that is at least slightly different from those of other firms (books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture) Rather than being a price taker, each firm faces a downward-sloping demand curve

6 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics 3. Easy entry and exit Firms can enter or exit the market without restriction The number of firms in the market adjusts until economic profits are zero

7 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Firm's Demand =AR

8 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short-run period Profit Entry of new firms Reduction in demand

9 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short-run period Loss economic loss Firms leave the industry Increase in demand

10 Monopolistic Competition ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Long-run period equilibrium No economic profit, no economic loss

11 Oligopoly ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union

12 Oligopoly ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics 1. A small number of firms Each firm's output is a large share of the market Each firm's pricing and output decisions have a substantial effect on the profitability of other firms Strategic behavior – possible collusion (An agreement among firms in a market about quantities to produce or prices to charge)

13 Oligopoly ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics 2. Similar or identical product (tennis balls, crude oil, mobile operators) 3. Mutual interdependence of firms 4. Difficult entry Barriers(Economies of scale, cost of differentiation of the product, legal restrictions) Barriers (Economies of scale, cost of differentiation of the product, legal restrictions)

14 Monopoly market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union

15 Monopoly market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Characteristics 1. A single seller 2. No close substitutes 3. Effective barriers to entry (Economies of scale, actions by firms, actions by the government)

16 Monopoly market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short- run & Long-run periods Profit will persist in the long run

17 Monopoly market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short-run period It is possible that a monopoly firm may experience losses

18 Monopoly market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Short-run period A monopoly firm will shut down in the short run if the price falls below AVC

19 Monopoly market Monopoly market vs. Perfectly competitive market ___________________________________________________________________________ ___________________________________________________________________________ This project is co-financed by the European Union Perfectly competitive market Price taker Perfectly competitive market Price maker Power of monopoly Lerner index