INTRODUCTION TO ECONOMICS

Case, Fair and Oster – Principles of Economics

Chapter 13
PINAR DENİZ
pinar.deniz@marmara.edu.tr
IMPERFECT COMPETITION AND MARKET
POWER: CORE CONCEPTS
• imperfectly competitive industry An industry in which single firms
have some control over the price of their output.
• market power An imperfectly competitive firm’s ability to raise price
without losing all of the quantity demanded for its product.
• Imperfect competition does not mean that no competition exists in the
market. In some imperfectly competitive markets competition occurs in more
arenas than in perfectly competitive markets.

• Firms can differentiate their products, advertise, improve quality, market

aggressively, cut prices, and so forth.
Forms of Imperfect Competition
• pure monopoly An industry with a single firm that produces a
product for which there are no close substitutes and in which
significant barriers to entry prevent other firms from entering the
industry to compete for profits.
• oligopoly
• monopolistic competition
• For a competitive firm MR
is simply the price, as
discussed in earlier.
• (TR=P*Q, dTR/dQ=MR=P)
• Every unit that the firm
sells, it sells at the going
market price. The
competitive firm is a very
small part of the overall
market, and its behavior
has no effect on the overall
market price. So, the
incremental or marginal
revenue from each new
unit sold is simply the
price.
• In the case of a monopolist,
however, the monopolist is
the market.
• If that firm decides to
double its output, market
output will double, and it is
easy to see that the only
way the firm will be able to
sell twice the output is to
lower its price.
• The fact that a
monopolist's output
decisions influence market
prices means that P and
MR will diverge.
The Absence of a Supply Curve in Monopoly
• Remember that in perfect competition, the supply curve of a firm in
the SR is the same as the portion of the firm’s MC curve that lies
above the AVC curve. As the price of the good produced by the firm
changes, the perfectly competitive firm simply moves up or down its
MC curve in choosing how much output to produce.

• The amount of output that a monopolist produces depends on its MC

curve and on the shape of the demand curve that it faces.
Price and Output Decisions in Pure Monopoly
Markets
• In a perfectly
competitive industry in
the long run, price will
be equal to long-run
average cost.
• The market supply
curve is the sum of all
the short-run marginal
cost curves of the firms
in the industry.
• Here we assume that
firms are using a
technology that exhibits
constant returns to
scale: LRAC is flat.
In the LR, • Big firms enjoy no cost
P = ATC = MC advantage.
Price and Output Decisions in Pure Monopoly
Markets
• Comparison of Monopoly and Perfectly
Competitive Outcomes for a Firm with Constant
Returns to Scale

• In the newly organized monopoly, the marginal cost

curve is the same as the supply curve that
𝑃𝑚 = $4.00 represented the behavior of all the independent
firms when the industry was organized
competitively.
• Quantity produced by the monopoly will be less
than the perfectly competitive level of output, and
𝑃𝑐 = 𝑀𝐶 the monopoly price will be higher than the price
under perfect competition.
$2.00

• Under monopoly, P = Pm = $4 and Q = Qm = 2,500.

• Under perfect competition, P = Pc = $3 and Q = Qc =

4,000.
𝑄𝑚 = 2,000 𝑄𝑐 = 4,000
 Monopoly in the Long Run: Barriers to Entry
What will happen to a monopoly in the LR? Of course, it is possible for a monopolist to suffer losses. Just
because a firm is the only producer in a market does not guarantee that anyone will buy its product.
In fact, many markets that end up competitive begin with an entrepreneurial idea and a short-lived
monopoly position.
For a monopoly to persist, some factor or factors must prevent entry.
• barrier to entry Something that prevents new firms from entering and competing in imperfectly
competitive industries.
• Economies of Scale: the cost advantages associated with size can give rise to monopoly power.
• Patents: legal barriers that prevent entry into an industry by granting exclusive use of the patented
product or process to the inventor.
• Government Rules: in some cases, governments impose entry restrictions on firms as a way of controlling
activity.(alcohol, for instance)
• Ownership of a Scarce Factor of Production: you can not enter the diamond producing business unless
you own a diamond mine.
• Network Effects: The value of a product to a consumer increases with the number of that product being
sold or used in the market. (Xbox, Farmville, etc.)
The Social Costs of Monopoly
• A demand curve shows the
amounts that people are willing
to pay at each potential level of
output.
• Thus, the demand curve can be
used to approximate the benefits
to the consumer of raising output
above 2,000 units.
• MC reflects the marginal cost of
the resources needed.

• The triangle ABC roughly

measures the net social loss.
• In chapter 13, sections after social costs of monopoly are not
included in the final exam topics! (page 310 of Case et al, Ed. 13)