1. Market Equilibrium and Market Demand: Imperfect Competition
Dr. Mohamed Riyazh Khan
DoMS – SNSCE

2. Discussion Topics Market structure characteristics
Monopolistic competition in selling
Oligopolies in selling
Monopolies in selling
Implications for consumer and producer surplus

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)

4. 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 caused by patents, etc. or barriers to exit)
Perfect knowledge of market conditions (quality outlook information from government and university sources)

5. Merging Demand and Supply
Price D S
Supply Curve PE
Equilibrium
Demand Curve QE
Quantity

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

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

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

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

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

11. Imperfect Competition
Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions
This chapter initially focuses on specific types of imperfect competitors in the farm input market, where firms are capable of setting the prices farmers must pay for specific inputs to their production.

12. Imperfect Competition in Selling

13. Unlike perfect competitors who face a
perfectly elastic demand curve, imperfect
competitors selling a differentiated product
benefit from a downward sloping demand
Curve

14. The marginal revenue in this instance is also downward
sloping, and goes to zero at the point where total revenue peaks.
Beyond this point, revenue falls as price falls.

15. Types of Imperfect Competitors in Input Markets
Monopolistic competition
Oligopoly
Monopoly
Let’s start here…

16. 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

17. 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

18. 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.

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

20. 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.

21. 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
you face weekly

22. Oligopolies A few number of sellers
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

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

24. Demand curve dd represents the
case when a single firm changes its price above Pe at point 1. This leads to a kinked demand curve d1D and a discontinuous marginal revenue curve between 2 and 5.

25. Demand curve dd represents the
case when a single firm changes its price above Pe at point 1. This leads to a kinked demand curve d1D and a discontinuous marginal revenue curve.
Why? Rival oligololists will match price cuts but not price increases in the short run because they want to capture a larger market share.

26. Meeting demand along the lower segment of the kinked demand curve, the firm is maintaining its market share.

27. Note that shifting MC curves reflecting technological advances will not affect PE and QE. It does affect profit however (MC drops from point 3 to point 4).

28. 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.

29. Monopolies 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.

30. 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.

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

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

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

34. 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).

35. Let’s compare a monopoly with
perfect competition from an
economic welfare perspective

36. 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

37. 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

38. 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.

39. Monopoly Case The monopolist producers where MC=MR, but sells at
a price PM which consumers are willing to pay.

40. Monopoly Case Consumers would be economically worse-off
by areas 1, 4 and 5 under
a monopoly.
They are paying a higher price PM for a smaller quantity QM.

41. Monopoly Case 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

42. Monopoly Case Finally, society as a whole would be economically
worse-off by areas 1+2. This
is called a dead weight loss.
This reflects the fact that
less of the economy’s
available resources in
this market are being used
to provide products to
consumers….

43. Summary of imperfect competitors from a selling perspective

44. Imperfect Competition in Buying

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

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

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

48. Buying Decisions by Perfect Competitors
Review graph on
page 161 in
Chapter 7 for more
background on the
MVP=MIC concept

49. Buying Decisions by a Monopsonist
Monopsonist makes decesions
along the marginal reveuve
product curve, which now differs
from MVP. The firm will
equate MRP=MIC at point A
and decide to buy quantity QM

50. Buying Decisions by a Monopsonist
This causes price to
fall from PPC to PM
which is referred to
as monopsonistic
explotation.

51. Case #1: Monopsonist
in buying and sole
seller of product.
Equilibrium is where
MRP=MIC at Point A.
Pricing off supply curve
gives QMM and PMM.

52. Case #2: Perfect
competition in buying
but monopoly in selling.
Equilibrium is where
MRP=Supply at Point C
which gives QPCM and
PPCM.

53. Case #3: Perfect
competition in selling
but monopsony in buying.
Equilibrium is where
MVP=MIC at Point E.
Pricing off supply curve
gives QMPC and PMPC.

54. Case #4: Perfect
competition in both selling
and buying.
Equilibrium is where
MVP=Supply at Point F
which gives QPC and
PPC.

55. 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

56. 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

57. Various segments of the livestock industry
Exhibit several forms of imperfect competition.

58. Governmental Regulatory Measures
Various approaches have been taken over time to
Counteract adverse effects of imperfect competition
In the marketplace. These include
1.Legislative acts passed by Congress, including the
Sherman Antitrust Act
2.Price ceilings
3.Lump-sum Tax
4.Minimum price or floors

59. #1:Legislative Acts Sherman Antitrust Act Packers and Stockyards Act
Cooperative Marketing Act
Robinson-Patman Act
Agricultural Marketing Agreement Act

60. #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.

61. #2: Implications of a Price Ceiling
The monopolist’s profit is
equal to APMBC or the
blue box to the left.

62. #2: Implications of a Price Ceiling
If government imposes a
price ceiling PMAX, the
demand curve is given by
PMAXED. This is also MR
up to Q1. Beyond Q1, FG
becomes the MR curve.

63. #2: Implications of a Price Ceiling
The price ceiling has the
effect of of causing the
monopolist to produce
more (Q1>QM) at a lower
price (PMAX<PM).

64. #2: Implications of a Price Ceiling
The monopolist’s profit
falls to area IPMAXEH or
green box above.

65. #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 and charging PM.

66. #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 producer
surplus from APMBC to
EPMBT, but does not change
its level of output or price.

67. #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 producer
surplus from APMBC to
EPMBT, but does not change
its level of output or price.
The loss in producer
surplus is area AETC
or blue box above.

68. #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.

69. #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.
Here the firm would actually
employ more of the resource.

70. 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.

71. Any Query….