Chapter 9 Imperfect Competition

Assumptions/Characteristics of Imperfect Competition There are many buyers in the industry. There are a large number of sellers in the industry There is freedom of entry to and exit from the industry. Reasonable knowledge as to profits made by other firms.

Assumptions/Characteristics of Imperfect Competition (Continued) Each firm tries to maximise profits (i.e. produce the quantity where MC = MR). Product differentiation exists via: Physical product differentiation Marketing differentiation Human capital differentiation Differentiation through distribution

Demand Curve Facing a Monopolistic/ Imperfectly Competitive Firm Each firm faces a downward sloping demand curve (AR curve) and consequently a marginal revenue curve (MR curve) lower than it. Monopolistic firms are price makers. Successful product differentiation means a more inelastic demand curve.

Equilibrium in Imperfect Competition

Long Run Equilibrium of an Imperfectly Competitive Firm Long run equilibrium occurs where MC = MR and AR = AC.

Advantages of Imperfect Competition Contestable markets Choice of goods Dynamically efficient Normal profit Access to information

Disadvantages of Imperfect Competition Production is not at minimum point of AC Excess capacity Price greater than MC

Imperfect Competition and Perfect Competition Compared The firms in both of these markets earn normal profit where AR = AC in the long run. The perfectly competitive firm produces at the lowest point of the AC, indicating efficient use of resources. This is not the case in imperfect competition.

Imperfect Competition and Perfect Competition Compared (Continued) Price is equal to MC in PC, which is not the case in imperfect competition. In the latter, price is greater than MC, indicating that more of the good could be produced. The PC firm faces a horizontal demand curve and the imperfectly competitive firm faces a downward sloping demand curve.

Imperfect Competition and Monopoly Neither produces at the lowest point of the AC, indicating a wasteful use of resources. Both face a downward sloping demand curve – price must be lowered to increase quantity demanded. In both markets, price is greater than MC, indicating that more of the good could be produced. The monopolist earns SNP in both the long and short run. The imperfectly competitive firm earns SNP only in the short run and normal profit in the long run.

Price Competition Price competition is where firms compete by changing their prices. The consumer prefers price competition because: The buyer gets the good at a lower price. This means the consumer has a greater disposable income. The consumer now has a choice – they can decide what to do with their income, e.g. buy more goods and get greater utility from the same income than previously.

Non-Price Competition Non-price competition is where firms compete using methods other than changing their prices. Benefits of non-price competition to consumers include: Prices remain stable rather than increasing, which benefits the consumer. There may be better after-sales service.

Non-Price Competition (Continued) Consumer loyalty may be rewarded by getting free gifts/club points, home delivery, 24-hour shopping, internet shopping and innovative use of technology for shoppers including self-scanning machines, etc. Consumers gain as advertising keeps them informed of special offers and new variations available in the product.