BAM 040: Managerial Economics

SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Lesson title: Imperfect Competition (Oligopoly, Monopolistic Materials:

Competition and Monopoly) Student Activity Sheets
Lesson Objectives: References:
1. I can differentiate the several market structures operating under Managerial Economics Business
imperfect competition. Strategy Ninth Edition by
2. I can enumerate the characteristics of market structure under Baye,Prince,2017
imperfect competition. Investopedia.com

“When you get to the end of the rope, tie a knot and
hang on.”

A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
Hello my dear student! Our topic today is a continuation of our previous topic about market structure.
Today, we are going to tackle firms operating under imperfect competition. But before that, let’s have a
quick review of our topic last meeting.

Review Test (3 min)

Can you enumerate the different characteristics of perfect competition? Kindly complete the diagram
below.

Perfect
Competition

1
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

B.MAIN LESSON
1) Activity 2: Content Notes (60 min)

Imperfect competition is a competitive market situation where there are many sellers, but they are
selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the
name suggests, competitive markets that are imperfect in nature.
Imperfect competition is the real world competition. Today some of the industries and sellers follow it to
earn surplus profits. In this market scenario, the seller enjoys the luxury of influencing the price in order
to earn more profits.
If a seller is selling a non-identical good in the market, then he can raise the prices and earn profits. High
profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily exit
the market.
All real-world markets are theoretically imperfect, and the study of real markets is always complicated by
various imperfections. They include:
• Competition for market share.
• High barriers to entry and exit.
• Different products and services.
• Prices set by price makers rather than by supply and demand.
• Imperfect or incomplete information about products and prices.
• A small number of buyers and sellers.

For example, traders in the financial market do not possess perfect or even identical knowledge about
financial products. The traders and assets in a financial market are not perfectly homogeneous. New
information is not instantaneously transmitted and there is a limited velocity of reactions. Economists
only use perfect competition models to think through the implications of economic activity.
The moniker imperfect market is somewhat misleading. Most people will assume an imperfect market is
deeply flawed or undesirable, but this is not always the case. The range of market imperfections is as
wide as the range of all real-world markets—some are much more or much less efficient than others.

Implications of Imperfect Markets

Not all market imperfections are harmless or natural. Situations can arise in which too few sellers control
too much of a single market, or when prices fail to adequately adjust to material changes in market
conditions. It is from these instances that the majority of economic debate originates.
Some economists argue that any deviation from perfect competition models justifies government
intervention to promote increased efficiency in production or distribution. Such interventions may come in
the form of monetary policy, fiscal policy, or market regulation. One common example of such
interventionism is anti-trust law, which is explicitly derived from perfect competition theory.

MARKET STRUCTURES

1. Monopolistic Competition
It characterizes an industry in which many firms offer products or services that are similar, but not
perfect substitutes. Barriers to entry and exit in a monopolistic competitive industry are low, and
the decisions of any one firm do not directly affect those of its competitors. Monopolistic
competition is closely related to the business strategy of brand differentiation.

2
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Monopolistic competition is a middle ground between monopoly and perfect competition (a

purely theoretical state), and combines elements of each. All firms in monopolistic competition
have the same, relatively low degree of market power; they are all price makers. In the long run,
demand is highly elastic, meaning that it is sensitive to price changes. In the short run, economic
profit is positive, but it approaches zero in the long run. Firms in monopolistic competition tend to
advertise heavily.
Monopolistic competition is a form of competition that characterizes a number of industries that
are familiar to consumers in their day-to-day lives. Examples include restaurants, hair salons,
clothing, and consumer electronics.

Profit-Maximizing Rule: Marginal Revenue = Marginal Cost (MR = MC)

2. Monopoly
It is a market structure in which there is a single firm producing all the output in a particular
market and there are high barriers to entry. Monopoly market is exact opposite to perfect
competitive market.

Features/ Characteristics/ Conditions for Monopoly: Causes of Monopoly:

1. A single firm- price maker 1. Control of resources;
2. No close substitute goods are available; 2. Control process of production;
3. High barriers to entry; 3. Economies of scale; legal barriers.
4. Goal is profit maximization;
5. Perfect knowledge

Demand Curve of the firm: Since there is a single firm in the industry, the firm’s demand curve is the
industry’s demand curve. The demand curve is downward sloping because monopolist is a price- maker.
He cannot fix both price and quantity. If he fixes a high price, less quantity of the good will be demanded.

Short-Run Equilibrium in Monopoly: There are two conditions for equilibrium of the
monopoly firm in the short- run:
1. MR = MC; and
2. Slope of MR < Slope of MC (Or MC curve cuts MR curve from below).

Long Run Equilibrium under Monopoly:

Since there are barriers to entry, new firm cannot enter the industry. Thus, monopolist can continue to
earn supernormal profits or at least normal profits in the long- run. He can even increase supernormal
profits through technological innovations or upgradations. He will not stay in business if he makes losses
in the long- run.
The long- run equilibrium conditions are:
MR = MC, P > MC, and P > AC

3. Oligopoly
It is a market structure with a small number of firms, none of which can keep the others from having
significant influence. The concentration ratio measures the market share of the largest firms. A monopoly
is one firm, a duopoly is two firms and an oligopoly is two or more firms. There is no precise upper limit

3
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm
significantly influence the others.
Oligopolies in history include steel manufacturers, oil companies, railroads, tire manufacturing, grocery
store chains, and wireless carriers. The economic and legal concern is that an oligopoly can block new
entrants, slow innovation, and increase prices, all of which harm consumers. Firms in an oligopoly set
prices, whether collectively—in a cartel—or under the leadership of one firm, rather than taking prices
from the market. Profit margins are thus higher than they would be in a more competitive market.

Collusive oligopoly refers to market structure in which few firms cooperate to establish price and output
levels in a particular market. In collusive oligopoly, firms are working together to set the price and output.
By collusion, firms lessen the pressure of competition and can increase economic profits. The two forms
of collusion are:
I. Cartels (where collusion is explicit); and
II. Price leadership (where collusion is implicit).

Non- Collusive Oligopoly

This implies absence of explicit or implicit understanding or agreement among the firms regarding price
fixation, market sharing or leadership.

Examples:
1. Pure Oligopoly – telecommunication companies – Globe and PLDT; cement – Cemex, Holcim,
Eagle Cement; petroleum companies – Petron Corporation, Pilipinas Shell Petroleum Corporation,
Chevron Philippines Inc.

2. Differentiated Oligopoly – automobiles – Hyundai, Toyota, Ford, Kia , Isuzu, Chevrolet

Market Characteristics
Structures Number of Number Barriers Entry and Identical or
Sellers of to Entry Exit Activity Differentiated
Buyers Products?
1. Perfect Many firms Many None Firms have Identical products, all
Competition buyers freedom to goods are perfect
enter and substitutes for
exit consumers
2. Many firms Many Very low Firms have Differentiated
Monopolistic with non- buyers freedom to products, but close
Competition interdependent enter and substitutes for
pricing and exit consumers so their
quantity demand curve is
decisions elastic
3. Oligopoly Few firms with Many High Difficult entry Products can either be
interdependent buyers identical or
pricing and differentiated
quantity
decision

4
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

4. Monopoly Single seller Many Complete Entry A single identical

buyers /high blocked product with no
substitutes

Activity 3: Skill-Building Activities (20min)

Part 1
Direction: Give at least 3 examples for each type of market structure. As much as possible, avoid using
those that are already mentioned in the concept notes.

Market Structure Name/Nature of Firms Products/Services Offered

a. a.
1. Perfect Competition b. b.
c. c.
a. a.
2. Oligopoly b. b.
c. c.
a. a.
3. Monopolistic
b. b.
Competition
c. c.
a. a.
4. Monopoly b. b.
c. c.

Part 2
Direction: Answer the following questions:

1. You are thinking of establishing a business in the future. What business would you like to put up?
What is the importance of knowing what kind of market structure your business will belong?

2. Supposed you are operating under a monopoly type of market structure, can you influence both the
price and the level of quantity or output given the fact that you are the only firm operating for a specific
region?

5
This document and the information thereon is the property of PHINMA Education

Name:______________________________________________________________
Section: ____________ Schedule:_____________________________________
Complete the graph - Monopoly
Figure 12.6 shows the cost and demand curves for a
dry-cleaner that has a monopoly in a small town..
a. In the figure, lightly darken the area of the
economic profit for single-price monopoly. What is the
amount of economic profit this firm makes?
b. Suppose the firm can price discriminate and set
one price for the second 10 articles of clothing, What
prices would it set? Darken the additional economic
profit the firm makes. What is the amount of the firm’s
economic profit now?
c. Suppose the firm is able to perfectly price
discriminate. More heavily darken the additional
economic profit the firm now makes. What is the
amount of the firm’s economic profit now?
This document and the information thereon is the property of PHINMA Education
BAM 040: Managerial Economics
SAS Module #23
Class number: _______
Date:_______________
Figure 12.8 shows both the average
total cost curves of a cable TV
company that is a regulated
monopoly. Also given are the
demand curve and marginal revenue
curve.
a. What price would the regulator set
using the marginal cost pricing rule?
b. What price would the regulator set
using the average cost pricing rule?
c. What price would the firm set if it
was unregulated?
6
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Complete the graph - Monopolistic Competition

Figure 13.2 shows the demand and marginal revenue

curve for Angel Pizza, a firm in monopolistic
competition. Draw the average total cost curve and
marginal cost curve so that Angel’s output is 40 pizzas
a day and its economic profit is $160. Is this a short-
run or long-run equilibrium?

Complete the graph - Oligopoly

Anytime, USA has two newspapers that have

a duopoly in the local market. The table
contains information on the market demand
and marginal revenue for news papers.
Marginal cost of a newspaper is 20 cents.
a. Graph the demand curve, marginal
revenue curve, and marginal cost curve in
Figure 12.5.
b. What price and quantity represent the
potential duopoly outcome?

7
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

2) Activity 5: Check for Understanding (20min)

Part 1
Direction: Without looking at the concept notes, differentiate the different types of market structure in
terms of the following factors:
Market Structure Type of Products Entry and Exit Number of Sellers Number of
Buyers
1. Oligopoly

2. Monopoly

3. Monopolistic
Competition
4. Perfect
Competition

Part 2 Situational Analysis

LVM Company is engaged in selling of bags of all sorts. Its competitors are producing the latest trend in
bags. The company owner however does not believe that he should spend more money in order to
create the latest bags. He further claims that in producing the newest bags which costs more, he should
sell it at a higher price. Finally, his decision is that his company should stick to producing bags that have
been highly demanded over the last 5 years. His financial advisors however advised him that trend
changes every year and therefore he should produce “kung ano ang uso/sikat sa mga kabataan.” His
advisors in addition said that the existing trend in bags is very likely to last for another 10 years. Various
reliable surveys show that people in this generation prefer trend over price.

Questions:
1) Is LVM Company correct in producing bags that have been highly demanded over the last 5 years
than the bags that are currently trending? Why?

2) Do you think that the existing bags of LVM Company will still be marketable and will consumers still
buy it? Why?

8
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5mins)

A. Work Tracker
Congratulations! You are done with our session! Let’s track your progress. Shade the session number
you just completed.

B. Think about your Learning

1. What part of the topic today is hard for you to understand? What actions/strategies you use in order
to understand the other topics?
__________________________________________________________________________________
__________________________________________________________________________________

2. What is your question about the topic today?

__________________________________________________________________________________
__________________________________________________________________________________

Key to Corrections
Pre-Test
1. Very large number of sellers and buyers 3. No artificial restraints 5. Free Entry and Exit
2. Firms selling identical products 4. Consumer with perfect information

Skill Building Activities

(These are suggested answers only. Answers may vary depending on the students’ ideas.)
Market Structure Name/Nature of Firms Products/Services Offered
a. Palengke/Supermarket a. Fruits and Vegetables,etc.
1. Perfect Competition b. b.
c. c.
a. Oil Companies a. Petroleum Products
2. Oligopoly b. b.
c. c.
a. Fast Food Restaurants a. Burgers, Fries
3. Monopolistic (Jollibee, McDo, Burger King)
Competition b. b.
c. c.
a. CELCOR in Cabanatuan City a. Electric power
4. Monopoly b. b.
c. c.

Part 2
Direction: Answer the following questions:
9
This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #23

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

1. Answers may vary.

2. No. Despite the fact that your business is operating as a monopoly, you cannot influence or control
both the price and the level of output. This is because of the government intervention in order to protect
the interest of the public.
Submit your activity sheets before the end of the session!

10
This document and the information thereon is the property of PHINMA Education