The most dangerous monopoly: When caution kills Demand Differences
Demand Differences Although Perfectly Competitive Markets do exist, the most common market structures are either: A monopoly or Imperfect Competition Monopoly Sole supplier of a product, thus, demand curve is that of entire market; considerable ability to influence price e.g. Megacomp – only seller of large supercomputers
Monopolistic Competition A monopolistic competitor has some influence over the price it charges A restaurant that serves unique food for example will lose/gain a greater percentage of customers due to a small percentage change in price A monopolistic competitor’s demand curve is elastic A monopolistic competitor’s demand curve is more elastic than the demand curves for monopolists
Oligopoly Each business makes up a considerable part of the market This leads to Mutual Interdependence – the relationship among oligopolists in which the actions of each business affect the other businesses Businesses in an oligopoly can therefore cooperate to increase combined profits, or become rivals
Rivalry Among Businesses Businesses in an oligopoly are concerned with maintaining their market share (proportion of total market sales) If Business A (out of A, B, C & D) raises its price for a product and the other 3 don’t, then Business A will lose a lot of sales If Business A lowers its price for a product, the other three will too, resulting in constant sales and lower total revenue Thus, rival oligopolists end up with a kinked demand curve – a demand curve with 2 segments – one fairly flat and one steep
Cooperation Among Businesses When oligopolists cooperate, its usually against the interest of consumers Price Leadership An understanding among oligopolists that one business will initiate all price changes in the market and the others will follow by adjusting their prices and output accordingly Collusion When oligopolists act together as if they are a monopoly Cartel A union of oligopolists who have a formal market-sharing agreement