Imperfect Competition and

Monopoly
Chapter 9
A. PATTERNS OF IMPERFECT COMPETITION
• Definition of Imperfect Competition
• Imperfect competition prevails in an industry whenever individual
sellers can affect the price of their output.
• The major kinds of imperfect competition are monopoly, oligopoly,
and monopolistic competition.
• Imperfect competition does not imply that a firm has absolute control
over the price of its product.
A. PATTERNS OF IMPERFECT COMPETITION
• Graphical Depiction. Figure 9-1 shows graphically the difference
between the demand curves faced by perfectly and imperfectly
competitive firms. Page (170)
• A perfect competitor faces a horizontal demand curve, indicating that
it can sell all it wants at the going market price.
• An imperfect competitor, in contrast, faces a downward-sloping
demand curve.
• Another way of seeing the difference between perfect and imperfect
competition is by considering the price elasticity of demand.
A. PATTERNS OF IMPERFECT COMPETITION

• For a perfect competitor, demand is perfectly elastic; for an imperfect

competitor, demand has a finite elasticity.
• Imperfect competitors are price-makers not price-takers.
• They must decide on the price of their product, while perfect
competitors take the price as given.
VARIETIES OF IMPERFECT COMPETITORS
• Economists classify imperfectly competitive markets into three
different market structures.
• Monopoly
• Which is a single seller with complete control over an industry.
• A monopolist is the only firm producing in its industry, and there is no
industry producing a close substitute.
• Moreover, for now we assume that the monopolist must sell
everything at the same price—there is no price discrimination.
VARIETIES OF IMPERFECT COMPETITORS

• One of the few examples of a monopoly without government license

is Microsoft Windows, which has succeeded in maintaining its
monopoly through large investments in research and development,
rapid innovation, network economies, and tough (and sometimes
illegal) tactics against its competitors.
• In the long run, no monopoly is completely secure from attack by
competitors.
VARIETIES OF IMPERFECT COMPETITORS
• Oligopoly
• The term oligopoly means “few sellers.” Few, in this context, can be a
number as small as 2 or as large as 10 or 15 fi rms.
• The important feature of oligopoly is that each individual firm can
affect the market price.
• In the airline industry, the decision of a single airline to lower fares
can set off a price war which brings down the fares charged by all its
competitors.
VARIETIES OF IMPERFECT COMPETITORS
• Monopolistic Competition
• The final category we examine is monopolistic competition .
• In this situation, a large number of sellers produce differentiated
products.
• This market structure resembles perfect competition in that there are
many sellers, none of whom has a large share of the market.
• It differs from perfect competition in that the products sold by
different firms are not identical.
VARIETIES OF IMPERFECT COMPETITORS
• Differentiated products are ones whose important characteristics
vary. Personal computers, for example, have differing characteristics
such as speed, memory, hard disk, modem, size, and weight.
• Because computers are differentiated, they can sell at slightly
different prices.
• Table 9-1 page 172.
B. MONOPOLY BEHAVIOR
• THE CONCEPT OF MARGINAL REVENUE
• Here are the key points to remember:
• 1. Marginal revenue ( MR ) is the change in revenue that is generated by an
additional unit of sales.
• 2. Price average revenue ( P AR ).
• 3. With downward-sloping demand, P > MR, P = reduced revenue on all
previous units.
• 4. Marginal revenue is positive when demand is elastic, zero when demand
is unit-elastic, and negative when demand is inelastic.
• 5. For perfect competitors, P = MR = AR . Figure 9-3 page 179.
PROFIT-MAXIMIZING CONDITIONS
• The maximum-profit price ( P *) and quantity ( q *) of a monopolist
come where the firm’s marginal revenue equals its marginal cost:
• MR = MC, at the maximum-profit P * and q *
• Monopoly Equilibrium in Graphs
• Figure 9-4 page 182.