Chapter 12 Imperfectly Competitive Markets

 There are three categories of imperfect competition among sellers Monopoly Monopolistic Competition Oligopoly

Monopolies  Characteristics of monopolies are: Single seller Unique Product, i.e., there are no close substitutes Ability to Set Prices (monopolist is a price maker; discriminating monopolists charge different prices to different classes of consumers) Barriers to Entry (a monopoly generally has an economic, legal or technical barrier to entry to other firms)

Monopoly  Strictly speaking, a pure monopoly - a one firm industry - is rare.  Monopolies may arise because sometimes it is the most efficient way to organize production and marketing activities.  Instead of breaking up monopolies in the US, it has been common policy to regulate them. The government has established many agencies to protect consumers from the adverse consequences of oligopolies & monopolies  Interstate Commerce Commission regulates transportation  Federal Communication Commission regulates telephone rates, tv, radio, etc.  State & Local Power Commissions regulate local utilities

Monopolistic Competition  Monopolistic Competition differs from Perfect Competition in the following ways: Differentiated Products (main difference from pure competition. Many firms, but fewer than under perfect competition Limited control over prices  A firm cannot increase prices significantly without losing customers to competitors.

Monopolistic Competition Limited or restricted entry  Entry is more difficult than in a perfectly competitive market  Firms are fairly large, and capital requirements are substantial  Advertising dollars alone can create a barrier to entry  Emphasis on brand names associated with higher quality

Oligopolies  Oligopoly means “few sellers”  Characteristics of Oligopolies are: Few Sellers - (ex. auto manufactures, oil industries, etc.) Some control over prices  Control over prices is limited due to interdependence with other firms (to avoid price wars)  Among oligopolistic industries are: Major farm machinery companies Farm chemical companies Major meat packers

Oligopolies  Oligopolistic industries can result from: More extreme product differentiation Higher entry costs Greater dependence on costly & long-term research & development efforts Easier access to major financial markets Aggressive merger & acquisition strategies