1. On Level Econ: Imperfect Competition1
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2. Imperfect Competition
FOUR MARKET STRUCTURES
Perfect
Competition
Monopolistic
Competition
Monopolistic
Competition
Pure
Monopoly
Pure
Monopoly
Oligopoly
Oligopoly
Imperfect Competition
Every product is sold in a market that can be considered one of the above market structures.
For example:
Fast Food Market
The Market for Cars
Market for Operating Systems (Microsoft)
Strawberry Market
Cereal Market 2
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4. Monopoly 4
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5. Four Market Structures
Perfect
Competition
Monopolistic
Competition
Monopoly
Oligopoly
Characteristics of Monopoly:
Examples: The Electric Company, De Beers(Diamond)
One large firm (the firm is the market)
Unique product (no close substitutes)
High Barriers- Firms cannot enter the industry
Monopolies are “Price Makers”
Some advertising
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6. What do you already know about monopolies?
True or False?
All monopolies make a profit.
Monopolies are usually efficient.
All monopolies are bad for the economy.
All monopolies are illegal.
Monopolies charge the highest price possible
The government never prevents monopolies from forming.
All are False 6
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7. Can a monopoly be good for the economy?
Ex: Electric Companies
If there were three competing electric companies they would have higher costs.
Having only one electric company keeps prices low
Economies of scale make it impractical to have smaller firms.
Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost. 7
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8. Regulating Monopolies
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9. Why Regulate? How do they regulate?
Why would the government regulate an monopoly?
To keep prices low
To make monopolies efficient
How do they regulate?
Use Price controls: Price Ceilings
Why don’t taxes work?
Taxes limit supply and that’s the problem
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10. Where should the government place the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency) OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
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11. Perfect Price Discrimination
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12. Price Discrimination Price Discrimination:
Practice of selling the same products to different buyers at different prices
Examples:
Airline Tickets (vacation vs. business)
Movie Theaters (child vs. adult)
All Coupons (spenders vs. savers)
EHHS football games (students vs. parents)
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13. Price Discrimination Requires the following conditions:
Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.
Those with inelastic demand are charged more than those with elastic
Requires the following conditions:
Must have monopoly power
Must be able to segregate the market
Consumers must NOT be able to resell product
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14. Monopolistic Competition
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15. Characteristics of Monopolistic Competition:
Perfect
Competition
Monopolistic
Competition
Monopolistic
Competition
Pure
Monopoly
Pure
Monopoly
Oligopoly
Oligopoly
Characteristics of Monopolistic Competition:
Relatively Large Number of Sellers
Differentiated Products
Some control over price
Easy Entry and Exit (Low Barriers)
A lot of non-price competition (Advertising)
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16. Examples: Fast Food Restaurants Furniture companies Jewelry stores
Hair Salons
Clothing Manufacturers
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17. “Monopoly” + ”Competition”
Monopolistic Qualities
Control over price of own good due to differentiated product
Plenty of Advertising
Not efficient
Perfect Competition Qualities
Large number of smaller firms
Relatively easy entry and exit
Zero Economic Profit in Long-Run since firms can enter
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18. Differentiated Products
Goods are NOT identical.
Firms seek to capture a piece of the market by making unique goods.
Since these products have substitutes, firms use NON-PRICE Competition.
Examples of NON-PRICE Competition
Brand Names and Packaging
Product Attributes
Service
Location
Advertising (Two Goals)
1. Increase Demand
2. Make demand more INELASTIC
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19. Differentiated Products19
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20. Why does DEMAND shift? When short-run profits are made…
New firms enter.
New firms mean more close substitutes and less market shares for each existing firm.
Demand for each firm falls.
When short-run losses are made…
Firms exit.
Result is less substitutes and more market shares for remaining firms.
Demand for each firm rises.
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21. Review Identify the 4 market structures. Define Price Discrimination.
List characteristics of monopolistic competition.
List Monopolistic Qualities.
List Competitive Qualities.
List examples of non-price competition.
List two goals of advertising.
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22. Oligopoly
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23. Characteristics of Oligopolies:
FOUR MARKET MODELS
Perfect
Competition
Monopolistic
Competition
Pure
Monopoly
Oligopoly
Characteristics of Oligopolies:
A Few Large Producers (Less than 10)
Identical or Differentiated Products
High Barriers to Entry
Control Over Price (Price Maker)
Mutual Interdependence
Firms use Strategic Pricing
Examples: OPEC, Cereal Companies, Car Producers
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24. HOW DO OLIGOPOLIES OCCUR?
Oligopolies occur when only a few large firms start to control an industry.
High barriers to entry keep others from entering.
Types of Barriers to Entry
1. Economies of Scale
Ex: The car industry is difficult to enter because only large firms can make cars at the lowest cost
2. High Start-up Costs
3. Ownership of Raw Materials
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25. The study of how people behave in strategic situations
Game Theory
The study of how people behave in strategic situations
An understanding of game theory helps firms in an oligopoly maximize profit.
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26. John Nash and Game Theory
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27. Game theory helps predict human behavior Where is the best location?
THE ICE CREAM MAN SIMULATION
1. You are a ice cream salesmen at the beach
2. You have identical prices as another salesmen.
3. Beachgoers will purchase from the closest salesmen
4. People are evenly distributed along the beach.
5. Each morning the two firms pick locations on the beach
Where is the best location?
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28. Where should you put your firm? Firm A decides where to goes first.B A
Firm A decides where to goes first.
What is the best strategy for choosing a location each day?
Can you predict the end result each day?
How is this observed in the “real-world”?
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29. Where should you put your firm? Firm A decides where to goes first.B
Firm A decides where to goes first.
What is the best strategy for choosing a location each day?
Can you predict the end result each day?
How is this observed in the “real-world”?
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*Note to teachers* (delete)
Assign one student firm A and another student firm B.
Ask firm A to put their ice cream anywhere along the beach. (the best place is right in the middle)
Ask firm B to put theirs in the most profitable location. (the best place is right next to firm A)
Explain that if firm B puts theirs anywhere other than right next to firm A they will be less profitable
Repeat with firm B choosing first.
Students learn that game theory explain why fast food restaurants and gas stations are often located near each other

30. SIMULATION! Why learn about game theory?
Oligopolies are interdependent since they compete with only a few other firms.
Their pricing and output decisions must be strategic as to avoid economic losses.
Game theory helps us analyze their strategies.
SIMULATION!
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31. Both Deny = 5 Years in jail each Both Confess= 10 Years in jail each
The Prisoner’s Dilemma
Charged with a crime, each prisoner has one of two choices: Deny or Confess
Prisoner 2
Deny
Confess
Both Deny = Years in jail each
Confess = Free
Deny =20 Years
Deny
Prisoner 1
Confess = Free
Deny = 20 Years
Both Confess= 10 Years in jail each
Confess
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32. Game Theory Matrix
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33. Without talking, write down your choice
Game Theory Matrix
You and your partner are competing firms. You have one of two choices: Price High or Price Low.
Without talking, write down your choice
Firm 2
High
Low
Both High =
$20 Each
Low = $30
High = 0
High
Firm 1
High = 0
Low = $30
Both Low=
$10 each
Low
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34. Game Theory Matrix Firm 2 Firm 1
Notice that you have an incentive to collude but also an incentive to cheat on your agreement
Firm 2
High
Low
Both High =
$20 Each
Low = $30
High = 0
High
Firm 1
High = 0
Low = $30
Both Low=
$10 each
Low
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35. Dominant Strategy Firm 2 $100, $50 $60, $90 Firm 1 $50, $40 $20, $10
The dominant strategy is the best move to make regardless of what your opponent does
What is each firm’s dominate strategy?
Firm 2
High
Low
High
$100, $50
$60, $90
Firm 1
$50, $40
$20, $10
Low
Firm #1-Dominant strategy is high since they should always go high
Firm #2- Doesn’t have a dominate strategy
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36. Dominant Strategy Firm 2 $100, $50 $60, $90 Firm 1 $50, $40 $20, $10
Nash Equilibrium- The optimal outcome that will occur when both firms make decisions simultaneously and have no incentive to change
Firm 2
High
Low
High
$100, $50
$60, $90
Firm 1
$50, $40
$20, $10
Low
The Nash Equilibrium- Firm 1 High, Firm 2 Low
Since Firm 1 will always go high, Firm 2 will decided to go low
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37. Video: Split or Steal
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38. Episode 8: The Dark Knight
Econmovies
Episode 8: The Dark Knight

39. What did we learn?
Oligopolies must use strategic pricing (they have to worry about the other guy)
Oligopolies have a tendency to collude to gain profit.
(Collusion is the act of cooperating with rivals in order to “rig” a situation)
Collusion results in the incentive to cheat.
Firms make informed decisions based on their dominant strategies
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