6/14/2023

CHAPTER 6
IMPERFECT COMPETITION

1. Monopolistic Competition

1.1. Characteristic
1

1.2. Producing in SR and LR

1.1. Characteristic
Monopolistic competition is a market structure
in which many firms sell products that are
similar but not identical.
Market Firm
Number of sellers

Product feature

Market power

Entry barrier
2

D curve and MR curve

A firm in monopolistic competition has market power
 D curve and MR curve are downward-sloping curves

(D)

(MR)
Q
3

1
 6/14/2023

1.2. Producing in
SR and LR

1.2. Producing in SR and LR

1.2.1. Producing in SR

To maximize the profit:

MR = MC

1.2.1. Producing in SR
$
MC
AC TR = SPoBQoO
B -
TC = SCAQoO
+
Po
A
C
II > 0
(D)

(MR)
Q
0 Qo 6

2
 6/14/2023

1.2.1. Producing in SR
$ LMC
LAC
A TR = SPoAQoO
Po = LAC -
TC = SPoAQoO
(D) II = 0
(MR)
Q
0 Qo 7

1.2.2. Producing in LR

$ $ LMC
LMC
LAC
A
LAC P0 = LAC
C B
A
P* = LACmin (D)
(d) = MR
(MR)

Q Q
0 Q* 0 Qo
A firm in perfect competition A firm in monopolistic competition

1.2.2. Producing in LR

Monopolistic
Perfect competition
competition
Po = LAC > LMC
Price P* = LACmin = LMC
(Po > P*)
Cost LACmin LAC
Qo at P > LMC
Quantity Q* at P = LMC
(Qo < Q*)
DWL None SABC

3
 6/14/2023

1.2.2. Producing in LR
Monopolistic Competition is less efficient
than Perfect Competition:
1. Excess capacity
•The monopolistic competitor operates on the downward-sloping part
of its ATC curve,
produces less than the cost-minimizing output.
•Under perfect competition, firms produce the quantity that minimizes
ATC.
2. Markup over marginal cost
•Under monopolistic competition, P > MC.
•Under perfect competition, P = MC.
10

2. Oligopoly
2.1. Charateristics
2.2. Competition

11

2.1. Characteristic
Oligopoly is a market structure in which
………………….sellers offer........................products

Market Firm
Number of sellers Few
Product feature Similar or identical

Market power High Can set the price

Entry barrier High Hard to entry

12

4
 6/14/2023

2.2. Competition
2.2.1. Price
2.2.2. Non-price

13

2.2.1. Price

When one firm decreases the $

• MC
price, its competitors decrease (D)
prices as well;
A
• When one firm decreases the P*
price, its competitors maintain
prices. MR
 Firm in oligopoly has a
kinked demand curve D
MR
Q* Q
14

2.2.2. Non – price

2.2.2.1. Game theory
• Game theory is the study of how people behave in
strategic situations.
• Nash equilibrium is a situation in which economic actors
interacting with one another each choose their best
strategy given the strategies that all the other actors have
chosen.

15

5
 6/14/2023

2.2.2.1. Game theory

The prisoners’ dilemma

Remain silent Confess

Remain A: 2 A: 1
silent B: 2 B: 10
B

A: 10 A: 5
Confess
B: 1 B: 5
16

2.2.2.2. Non – price competition

A
Doing
Advertising
nothing
5 mil 0 mil
Advertising
10 mil 15 mil
B

Doing 8 mil 2 mil

nothing 6 mil 10 mil
17