UNIT 9

Understand the features of imperfect competition.

 MONOPOLY
Monopoly is derived from the Greek words monos, meaning “single” and polein,
meaning “sell”.

Monopoly is a market structure in which there is only one seller of a good or service
that has no close substitutes.
A further requirement is that entry to the market should be completely blocked.

The single seller or firm is called a monopolist or monopolistic firm.

The demand for the product of the industry (or the market demand) is also the
demand for the product of the single firm (or monopolist).
EQUILIBRIUM OR PROFIT MAXIMISING POSITION FOR
A MONOPOLIST
The profit-maximising decision of a monopolist is exactly the same as that of any
other firm. i.e.;
A monopolist should produce where marginal revenue (MR) is equal to marginal
cost (MC) (the profit-maximising rule), provided that average revenue (AR) is greater
than minimum average variable cost (AVC) in the short run or average total cost AC in
the long run (the shut-down rule).
Since a monopolist is the only supplier of the specific product, the demand curve for
the product of a monopolistic firm is the market demand curve for the product of
the industry
SHORT –RUN EQUILIBRIUM OF A FIRM UNDER
MONOPOLY
MONOPOLY VS PERFECT COMPETITION
Monopolistic Competition
Monopolistic competition combines certain features of monopoly and perfect
competition. Firms are said to be “competing monopolists”.

In a monopolistically competitive market a large number of firms produce similar but

slightly different products.

Features of Monopolistic Competition

• Each firm produces a distinctive, differentiated product.
• Each firm faces a downward-sloping demand curve for its particular product.
• There are a large number of firms in the industry.
• There are no barriers to entry or exit.

A monopolistically competitive firm has a certain degree of monopoly power, as it is

the only producer of the particular brand or variety of the product. Under
monopolistic competition, each firm is thus in effect a mini-monopoly.
Short – run Equilibrium of a Monopolistic firm
Long – run Equilibrium of a Monopolistic firm
Oligopoly
The word oligopoly comes from the Greek words oligoi, meaning “few”, and polein,
meaning “sell”.
Under oligopoly a few large firms dominate the market. A duopoly exists when there
are only two firms in the industry.

The product may be homogeneous (e.g. steel, cement : PURE OLIGOPOLY), but it is
mostly heterogeneous (e.g. motorcars, cigarettes, household appliances :
DIFFERENTIATED OLIGOPOLY)

The main feature of oligopoly is the high degree of interdependence between the
firms.
Oligopoly-Kinked Demand Curve
Implications of the kinked demand curve

 One implication of the Kinked Demand curve is that MC can increase or decrease
without affecting equilibrium output an price

 There is unlikely to be permanent price competition under oligopoly;

 Firms will compete through non-price methods such as advertising, promotions

and product development; and

 Firms may engage in collusive agreements and form cartels

Shortcomings of the kinked demand curve model

 The theory is difficult to test effectively because it does not actually explain
how the price is initially determined;
 The model takes no account of non-price competition which is an important
feature of the market; and
 There are other reasons for infrequency of price adjustments such as their cost,
lost customer goodwill which may be as equally important as the more specific
market pressures.