Perfect and Imperfect Competition Chapter 9: Alternative models of Competition Perfect and Imperfect Competition

Perfect (Pure) Competition Models of Competition Perfect (Pure) Competition Horizontal demand curve P = MR = AR No individual firm large enough to influence price Demand "perfectly elastic" (infinite elasticity) Profit maximum where MC=MR Homogeneous product (your corn and mine!)

AC AFC Y* Price Pure Competition $ MC AVC Output MR=AR=D=P MC=MR Profit MR=AR=D=P AFC Output Y*

Y* Price $ MC AC =AVC No profit in long run equilibrium. Output MC=MR MR=AR=D=P No profit in long run equilibrium. Output Y*

Monopolistic Competition Models of Competition Monopolistic Competition D not equal to MR Demand curve not horizontal (slight downward slope) Demand elastic but not perfectly so Some product differentiation Elasticities more negative than -1 Examples: -3, or -25 Canned peas!!!

Price $ Profit Demand P* Output Monopolistic Competition $ MC AC Profit Demand P* MC=MR MR Output Y*

In monopolistic competition, pure (economic) profit is possible, but not assured in long run equilibrium.

Models of Competition Oligopoly "Few" sellers Pricing and output decisions by firm linked to pricing and output decisions of other firms in the industry "Kinked" demand curve Competition ignores price increases but follows price decreases Prices tend to be sticky

Product differentiation is a key characteristic For an Oligopoly, there are possible pure profits in the Long Run Airlines, Automobiles and Computers (perhaps) Product differentiation is a key characteristic

Price Oligopoly $ The "Kink" P* Y* Output MC Demand MC=MR MR MR discontinuous MR MC=MR Y* Output MR

Impact of Changing Marginal Costs on Oligopoly Pricing

Price Demand MC $ The "Kink" P* discontinuous MR MC=MR MR Y* Output

Price $ Demand MC The "Kink" P* discontinuous MR MC=MR MR Y* Output

Price $ MC Demand The "Kink" P* discontinuous MR MC=MR Y* MR Output

Price Output MC MC=MR Demand MR MR New P Old P discontinuous new Y old Y

Models of Competition Monopoly 1 Firm Firm is the industry There can be long run profits Not always profitable (Monopoly in hula hoops!) Patents, licenses D not equal to MR Elasticity depends on how badly consumers need (want) the good Are there good substitutes ? Polaroid???

Price Monopoly MC $ AC P* Profit MC=MR Demand Y* Output MR

Contemporary views of Imperfect Competition

Bain Model (due to Joe Bain) Economic Conduct Industry of Structure Performance Firms

Economic Conduct Industry Structure of Performance Firms S P C Number of firms in 4 P's Industry Industry Price Percentage of Profitability Product output by Price vs. AC Promotion Top 5, top 10 etc. Predatory Concentration practices ratio

S C P Do arrows run both directions??? Conduct Industry Economic of Structure Performance Firms S C P

Firm Growth options: 1. Horizontal mergers 2. Conglomerates 3. Vertical integration 4. Internal growth through reinvestment of profits

Limits to Growth: 1. Competition in industry 2. Access to capital markets 3. Demand for goods produced 4. Antitrust laws 5. Overall profitability 6. Patents, licenses held by others

Agricultural Bargaining Farmers are (usually) price-takers Cooperatives formed: inputs--Southern States, Cenex outputs--dairy coops attempt to cooperate to get lower input prices higher output prices works (sometimes!) dairy and oranges but not wheat and beef