Perfect Competition, Monopoly, Oligopoly and Monopolistic Competition in Seller Markers Allan Fels, Professor of Government The Australia and New Zealand School of Government (ANZSOG)

1) PERFECT COMPETITION Characteristics Many buyers and sellers, with no dominant firm Homogenous product Free entry and exit (usually) Examples Wheat Milk

1) PERFECT COMPETITION Behaviour and Pricing Firms are price takers Continual pressure to satisfy customer demand, minimise cost, innovate in order to survive Collusion Difficult: Too many competitors to organise If prices rise, there will be entry by competitors Government induced collusion. The government may run the market as a cartel by a) setting a minimum price; b) restricting entry Examples Taxis Doctors

2) MONOPOLY Characteristics Sole seller No close product substitutes Causes of monopoly Entry barriers Source of entry barriers Monopoly of resources Government regulation Production process (natural monopoly) Examples Networks? E.g. telco, energy Innovators?

Behaviour and prices Assume profit maximisation occurs? Or less pressure to operate efficiently Monopoly can determine its own price but in raising price it is at the expense of quantity The concept of marginal revenue i.e. the addition to revenue from producing and selling one more unit Monopoly produces up to the point where marginal cost equals marginal revenue Profits tend to be “above normal” but accounting results can be a poor indicator of monopoly profits Price discrimination requires Monopoly Different elasticities Ability to separate the market 2) MONOPOLY

3) OLIGOPOLY Characteristics Few sellers Interdependent Pricing and behaviour Note the relevance of game theory Prisoners’ dilemma Cooperation vs conflict Cournot Adjust price Bertrand Adjust quantity Examples Banks, oil companies, cement

4) MONOPOLISTIC COMPETITION Characteristics Many sellers Product differentiation Free entry Examples Books, CDs, films, computer games, restaurants, piano lessons, furniture etc Behaviour Free entry tends to prevent “excessive” profits

5) INDICATORS OF COMPETITION Imports Substitutes Entry Countervailing power Other factors eg. dynamic factors such as technology Vertical integration?

6) PUBLIC POLICIES Monopoly 1.Introduce more competition 2.Regulate behaviour 3.Public ownership 4.Competition for the market as opposed to competition in the market 5.Take no action Collusion Cartel laws Price regulation Structural remedies