1. Market Equilibrium and Product Price: Imperfect Competition
Chapter 9

2. Discussion Topics Market structure characteristics
Imperfect competition in selling
Imperfect competition in buying
Market structure in livestock industry
Governmental regulatory measures

3. Market Structure Characteristics
Number of firms and size distribution
Product differentiation
Barriers to entry
Picture here tells a tale of two markets (no. 2 yellow corn vs. farm equipment)
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4. Market Structure Characteristics
Number of firms and size distribution
Product differentiation
Barriers to entry
Existing economic environment (the conditions of supply and demand)
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6. Perfect Competition
Up to now we have been assuming the firm and market reflect the conditions of perfect competition… farmers come close as anybody to meeting these conditions.
A large number of small firms (2 million farms)
A homogeneous product (no. 2 yellow corn)
Freely mobile resources (no barriers to entry, no patents, for example, as well as no barriers to exit)
Perfect knowledge of market conditions (outlook information from government and university sources, for example, The Texas Agricultural Extension System or the U.S. Department of Agriculture)

7. Merging Demand and Supply
Price D S
Chapters 6,8 PE
Chapter 8
Chapters 3,4,5 QE
Quantity

8. Firm is a “Price Taker” Under Perfect Competition
The Market
The Firm
Price
Price D S
AVC MC PE QE
OMAX
Quantity

9. If Demand Increases…… The Market The Firm S AVC MC PE QE Quantity
Price D1 D
Price S
AVC MC PE QE
10 11
Quantity

10. If Demand Decreases…… The Market The Firm D S D2 AVC MC PE QE Quantity
Price
Price D S D2
AVC MC PE QE
9 10
Quantity

11. Firm is a “Price Taker” in the Input Market
Labor Market
The Firm
Price
Price D S
MVP
MIC PE QE
LMAX
Quantity

12. Firm is a “Price Taker” in the Input Market
Labor Market
The Firm
Wage
rate
Price D S
MVP
MIC PE QE
LMAX
Quantity

13. Imperfect Competition in Selling

16. Imperfect Competition
Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions

17. Imperfect Competition in Selling

19. Page 150 Imperfect competitors selling a differentiated product
have a downward sloping demand curve since now they can
have an influence on price (e.g., they can differentiate product)
(unlike perfectly competitive firms which have a perfectly
elastic horizontal demand curve because they and buyers
cannot influence price)
Page 150

20. Page 150 The marginal revenue in this instance also is downward
sloping, and goes to zero at the point where total revenue peaks
Page 150

21. Types of Imperfect Competitors on the Selling Side
Monopolistic competition
Oligopoly
Monopoly
Let’s start here…

23. Monopolistic Competitors
Many sellers
Ability to differentiate product by advertising and sales promotions
Profits can exist in the short run, but others bid them away in the long run
Equate MC with MR, but price off the downward sloping demand curve
Page

24. Page 150 Short run profits. The firm produces QSR where MR=MC at
E above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay
Page 150

25. Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E.
Page 150

26. At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above…
Page 150

27. In the long run, profits are bid away as more firms enter the market
In the long run, profits are bid away as more firms enter the market. Or losses will no longer
exist as firms leave the market. At QLR, the remaining firms are just breaking even as shown
by the lack of gap between the demand curve and ATC curve.
Page 151

28. Top 10 Burger Restaurants
Rank
Brand
Market Share
Advertising
Mil. Dol. 1
McDonald’s
42.8%
$571.7 2
Burger King
20.2
407.5 3
Wendy’s
11.5
188.4 4
Hardee’s
5.7
50.5 5
Jack in the Box
3.6
51.2 6
Sonic Drive-ins
3.3
28.1 7
Carl’s Jr.
1.9
34.3 8
Whataburger
1.1
6.7 9
White Castle
1.0
10.1 10
Steak n Shake
0.9
Total Top 10
92.0%
$1,347.4
Total Market
$42.3 billion
$1,359.7
Imperfect competition (monopolistic competition) you face weekly

29. Oligopolies
A few number of sellers, each of which is large enough to have influence on market volume and price
Non-price competition between oligopolists
Match price cuts but not price increases by fellow oligopolists
Like monopolistic competitors, they have some ability to set market prices
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31. Examples of Oligopolists
Farm machinery manufacturers
Domestic automobile industry
Domestic airline industry
Pesticide and fertilizer industry
Products sold are largely identified or differentiated by company brand or name.

32. Page 154 Demand curve DD represents the case when all oligopolists
move prices together and share
the market.
Page 154

33. Page 154 Demand curve dd represents the
case when a single firm changes its price above Pe at point 1. This situation leads to a kinked demand curve d1D and a discontinuous marginal revenue curve.
Note: dd is more elastic than DD
Why? Rival oligopolists will match all price cuts but not all price increases in the short run because they want to maintain market share.
Page 154

34. Meeting demand along the lower segment of the kinked demand curve, the firm is maintaining its market share.
This situation also explains why there is a tendency for prices to remain at Pe
Page 187

35. Note that shifting MC curves reflecting technological advances will not affect PE and QE. (MC drops from point 3 to point 4).
This situation explains why oligopolistic markets are characterized by infrequent price changes. Firms usually do not change their price-quantity combinations in response to small shifts of their cost curves.
Page 187

36. Monopoly (not the Parker Brothers Game)
Only seller in the market
Entry of other firms is restricted by patents, etc.
They have absolute power over setting market price
They produce a unique product
They can make economic profits in the long run because they can set price without competition.
Page

38. Page 156 Total revenue is equal to the area 0PECQE,
which forms the blue
box to the left…
Notice the monopoly,
like the previous forms
of imperfect competition,
produces where MC=MR
(point A), but then reads
up to the demand curve
(point C) when setting
price PE.
Page 156

39. Page 156 Total variable costs for the monopolist is equal
to area 0NAQE, or the
yellow box to the left.
Page 156

40. Page 156 Total fixed costs for the monopolist is equal to
area NMBA, or the green
box to the left…
Page 156

41. Page 156 Total cost is therefore equal to area 0MBQE, or the
green box plus the yellow
box to the left
Page 156

42. Page 156 Finally, the economic profit earned by the monopolist is
equal to area MPECB, or
total revenue (blue box)
minus total costs (green box
plus yellow box).
Page 156

43. Let’s compare a monopoly with
perfect competition from an
economic welfare perspective
Page 157

44. Perfect Competition Case
Consumer surplus under
perfect competition is
equal to the sum of areas
1, 4, 5, 8 and 9, or the
blue triangle to the left
Page 157

45. Perfect Competition Case
Producer surplus under
perfect competition is
equal to the sum of areas
2, 3, 6 and 7, or the
green triangle to the left
Page 157

46. Perfect Competition Case
Total economic surplus
under perfect competition
is therefore equal to the
blue and green triangles
to the left, or the sum of areas 1 through 9.
Page 157

47. Monopoly Case Page 157 Consumer surplus under a monopoly is equal to
the sum of areas 8 and 9,
or the new blue triangle
to the left
Thus, consumers would
be economically worse off
by areas 1, 4 and 5 under
a monopoly. They are
paying a higher price PM
and they are receiving a
smaller quantity QM.
Page 157

48. Monopoly Case Page 157 Producer surplus under a monopoly is equal to
the sum of areas 3, 4, 5,
6 and 7, or the green area
to the left.
Thus, producers lose area
2 but gain areas 4+5, making
them economically better off
than perfect competitors
Page 157

49. Monopoly Case Page 157 Finally, society as a whole
would be economically
worse off by areas 1+2. This
magnitude of loss is called
a dead weight loss. Dead weight
loss may not necessarily be large.
This measure reflects the cost
to society due to the existence of
a monopoly in lieu of perfect
competition.
Page 157

50. Summary of imperfect competitors from a selling perspective
Page 157

51. Imperfect Competition in Buying

52. Types of Imperfect Competitors on the Buying Side
Monopsony
Monopsonistic competition
Oligopsony
Let’s start here…

54. Monopsonies Single buyer in the market
Focus is on the marginal input cost of purchasing an addition unit of resources
Will equate MRP=MIC when making buying decisions
As long as MRP>MIC, the monopsonist makes a profit
Page

55. Buying Decisions by Perfect Competitors
Marginal revenue product
same as marginal value
product under perfect
competition.
Page 160

56. Page 160 Monopsonist now facing upward sloping MIC since
it can influence market price
Page 160

57. Buying Decisions by a Monopsonist
The monopsonist makes decisions
along the marginal revenue
product curve. The firm will
equate MRP=MIC at point A
and decide to buy quantity QM
Page 161

58. Buying Decisions by a Monopsonist
This situation (imperfect competition in buying) causes price to
fall from PPC to PM which is referred to as monopsonistic
exploitation. Economists wish to measure this price difference.
Page 161

59. Monopsonistic Competitors
Many firms buying resources
Ability to differentiate services to producers
Differentiated services includes distribution convenience and location of facilities, willingness to provide credit or technical assistance
P and Q determined same as monopsonist
Page 161

60. Oligopsonies A few number of buyers of a resource
Profit earned will depend on elasticity of supply for resource (less elastic than monopsonistic competition)
Each oligopsonist knows fellow oligopsonists will respond to changes in price or quantity it might initiate
P and Q determined same as monopsonist
Page 161

61. Various segments of the livestock industry
exhibit several forms of imperfect competition.
Page 162

62. Governmental Regulatory Measures
Various approaches have been taken over time to
counteract adverse effects of imperfect competition
in the marketplace. These approaches historically include
1. Legislative acts passed by Congress, including various
antitrust laws
2. Price ceilings
3. Lump-sum tax
4. Minimum prices or floors
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63. #1:Legislative Acts Sherman Anti-trust Act 1890 Clayton Act 1914
Packers and Stockyards Act 1921
Capper-Volstead Act 1922
Cooperative Marketing Act 1926
Robinson-Patman Act 1936
Agricultural Marketing Agreement Act 1937

64. #2: Implications of a Price Ceiling
Without regulatory interference,
the monopolist will equate MR
and MC at point C, produce QM
and charge price PM.
Page 164

65. #2: Implications of a Price Ceiling
The monopolist’s profit is
equal to the blue box.
Page 164

66. #2: Implications of a Price Ceiling
If the government imposes a price ceiling PMAX, the demand curve is given by PMAXED. This demand curve also is the MR curve up to Q1. Beyond Q1, the segment FG becomes the MR curve.
Page 164

67. #2: Implications of a Price Ceiling
The price ceiling has the
effect of causing the
monopolist to produce
more (Q1>QM) at a lower
price (PMAX<PM).
Page 164

68. #2: Implications of a Price Ceiling
The monopolist’s profit
falls to area IPMAXEH or
the green box above.
Page 164

69. #3: Implications of Lump-Sum Tax
The monopolist equates
MC=MR at point F,
producing QM, and reading
up to the demand curve at
point B, will charge PM.
Page 165

70. #3: Implications of Lump-Sum Tax
The lump-sum tax on the
monopolist raises the firm’s
average total costs from
ATC1 to ATC2. This tax lowers
the monopolist’s profit
from APMBC to EPMBT,
but does not change
its level of output or price.
Page 165

71. #3: Implications of Lump-Sum Tax
The lump-sum tax on the
monopolist raises the firm’s
average total costs from
ATC1 to ATC2. This lowers
the monopolist’s profit
from APMBC to EPMBT,
but does not change
its level of output or price.
The loss in profit
is area AETC
or blue box above.
Page 165

72. #4: Implications of Minimum Price
Without a minimum price,
the monopsonist would equate
MRP=MIC and employ QM
units of the input and pay PM.
Page 166

73. #4: Implications of Minimum Price
If a minimum price PF is
imposed (think of a minimum
wage rate), the monopsonist’s
MIC curve would be PFDCB.
Now, the firm would actually
employ more of the resource.
Page 166

74. Summary
Unlike perfect competition, imperfect competitors have ability to influence price.
Monopolistic competitors try to differentiate their product.
Monopolists are the only seller in their product market. Monopsonists are the only buyer.
Oligopolies are a few number of sellers while oligopsonies are a few number of buyers.
Know the economic welfare implications of imperfect competition at least on the selling side.