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Perfect competition
Imperfect competition
a) Monopoly and Monopsony
b) Monopolistic competition
c) Oligopoly and Oligopsony
Ê   


° perfectly competitive market must meet the
following requirements:
ë moth buyers and sellers are price takers.
ë The number of firms is large.
ë There are no barriers to entry.
ë The firms¶ products are identical.
ë There is complete information.
ë Firms are profit maximizers.
  

° The concept of competition is used in two ways
in economics.
Ł Competition as a process is a rivalry among firms.
Ł Competition as the perfectly competitive market
structure.
u   
  

° moth buyers and sellers are price takers.
Ł 2
 is a firm or individual who takes
the market price as given.
Ł In most markets, households are price takers ±
they accept the price offered in stores.

° moth buyers and sellers are price takers.

Ł The retailer is not perfectly competitive.
u   
  

° The number of firms is large.
ëÔarge means that what one firm does has no
bearing on what other firms do.
ë ny one firm's output is minuscule when
compared with the total market.
u

 
  

°
hen a firm operates in a perfectly competitive
market, it¶s supply curve is that portion of its
short-run marginal cost curve above average
variable cost.
   

° The demand curves facing the firm is different
from the industry demand curve.
° perfectly competitive firm¶s demand schedule
is perfectly elastic even though the demand curve
for the market is downward sloping.
° Individual firms will increase their output in
response to an increase in demand even though
that will cause the price to fall thus making all
firms collectively worse off.

 
  
Market Firm

Price Market supply Price

$10 $10

8 8 Õ







6 6

4 Market 4
demand
2 2

0 0
1,000 3,000 Quantity 10 20 30 Quantity
 Perfect Competition

Market Supply

pe

Market Demand
-
 Perfect Competition

Market Supply
p¶
pe At a price of p¶, zero is
demanded from the firm.

Market Demand
-
 Perfect Competition

Market Supply
p¶
pe At a price of p¶, zero is
demanded from the firm.
p´
Market Demand
-
At a price of p´ the firm faces the entire
market demand.
 Perfect Competition

Market
Supply

Market
Demand
y
-
Firm¶s Demand Curve
  
   
° Perfectly Competitive: many firms, identical
products, free entry and exit, full and symmetric info
° Monopoly: single firm, no close substitutes,
barriers to entry, full and symmetric info
° Oligopoly: several firms, similar products, degree of
product differentiation varies depending upon the
market, might be barriers, full and symmetric info
° Monopolistic competition: many firms, similar
products, slightly differentiated products, free entry
and exit, full and symmetric info




° This is the classic

³textbook´ market
structure.
° Firms in a competitive
market all make a product
that is perfectly
substitutable: all
demanders are equally
satisfied with any
supplier¶s product.



Monopsony is a situation where there is

one buyer ± you have seen Monopoly, a
case of one seller. Here we want to
explore the impact on the market when
there is only one buyer of labor.



° The single seller makes a

product that has no
³good´ substitute.
° Other firms may be able
to produce the good or
service but choose not to
enter the market or are
barred from it.
[p to now in our studies we have assumed
-firms are price takers in the output market ± meaning the price is set
in the market by the interaction of many buyers and sellers and then
any one firm just works with the market price,
-firms are wage takers in the input market ± meaning the wage is set in
a market setting as well.
Here we have the situation of a single buyer of labor and because of
this the firm has the ability to set the wage instead of take the wage.
Ôet¶s start with a non-discriminating monopsonist. Recall that
suppliers of labor have an upward sloping supply of labor curve
(ignoring the backward bending case). In fact we take as given the
market supply of labor as the sum of the labor supply from many
individuals. On the next slide I have an example.

age Qs
4 0 ÿ
5 1
S
6 2
7 3
8
8 4 7
6
5

1 2 3 4 Ô

In this example the suppliers of labor will supply a q of 1 when the

wage is 5, and so on.

age Qs TÔC MÔC
4 0 0 xxx ÿ
5 1 5 5 MÔC
S
6 2 12 7
7 3 21 9
8
8 4 32 11 7
6
5

1 2 3 4

nondiscriminating monopsonist has to pay all the workers hired

the same amount. TÔC is the total labor cost (just the wage times
the Qs) and MÔC is the marginal cost of labor (the change in TÔC
divided by the change in labor supplied Qs).
?ote, in order to get two units of labor the firm would
have to pay 12  6 to each worker. mut the first worker
would have worked for 5. So the marginal cost to the firm
of the second worker is 7, which is the 6 to get the second
worker but includes the 1 you give to the first worker.
similar story holds for all future units of labor.
The point here is that from the point of view of the firm
the MÔC curve is not the supply of labor curve. The MÔC
curve is above the supply of labor curve. The MÔC curve is
the curve that shows the change in total labor cost from
having additional units of labor. The curve will be used to
think about how much labor the firms would want to hire.
The other piece of information here is to remember that
the demand for labor curve was the value of the marginal
product of labor curve. It deals with the revenue of
additional works.
 mployment or hiring decision by the firm
The profit maximizing non-discriminating monopsonist
will hire labor up to the point where the value of the
marginal product equals the MÔC. Recall the marginal
revenue product is the revenue generated by the additional
worker.
The wage paid to each worker is the wage on the supply
curve at the optimal quantity.
On the next screen
e have the result in a graph.
 ÿ MÔC

1

MRP = D

Ô
Ô1
The firm on the previous screen does not want to go past
the employment level where the MRP = MÔC because
those workers would bring in less revenue than the cost to
hire them and thus the firm would lose out on some profit.
Plus the firm would not want to stop short of this point
because they would not take units of labor where the
revenues of the labor are greater than the costs of taking
the labor.
On the next slide we compare the result of monopsony
with that of competition. In competition the wage and
quantity traded occur where the supply and demand are
equal.
 ÿ MÔC

c

1

MRP = D

Ô
Ô1 Ôc
 The monopsony pays a lower wage than in competition
and hires less labor.
Remember a monopsony is a single buyer of labor. Often
in economics we see that if the demand or supply side of
the market has only 1 player then the single actor has
market power. The market power often results in less
than desirable outcomes. Here the single buyer uses
power to pay lower wages and thus fewer folks want to
work at that low wage.
The monopsony likes this outcome better than
competition but not everyone else.
orkers get lower
wages and less work and since less labor is desired less
output is made ± output people probably want.
?ote here that the monopsony pays the workers less than there MRP ± W <MRP.
In this sense it has been said the monopsony exploits the workers.

 


° The market has

many firms but each
supplier¶s product is
differentiated.
° Consumers can be
induced to change
brands but they
have brand
preferences.

 

° Monopolistic Competition Characteristics
° Many buyers and sellers.
° Product heterogeneity.
° Free entry and exit.
° Perfect information.
° Opportunity for normal profits in long-run
equilibrium.

 
  

 
° Set M = MR - MC = 0 to maximize profits.
° MR=MC at optimal output.
° ?o durable economic profits because P= R= C.

 
  

 
° Set M = MR - MC = 0 to maximize profits.
° MR=MC at optimal output.
° ?o durable economic profits because P= R= C.

 
  
° Short-run Monopoly quilibrium
Ł Monopolistically competitive firms take full advantage
of short-run monopoly.
° Ôong-run High-price/Ôow-output quilibrium
Ł
ith differentiated products, P= C at a point above
minimum ÔR C.
Ł P > MR = MC.
° Ôong-run Ôow-price/High-output quilibrium
Ł
ith homogenous products, P= C at minimum ÔR C.
Ł This is a competitive market equilibrium with
homogeneous production.
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MC
Additional profit from
perfect price discrimination



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° few sellers make

products that are good,
but not perfect,
substitutes.
° Consumers can be
induced to change
suppliers but have only
a limited number of
choices.
 

° Oligopoly Market Characteristics
Ł Few sellers.
Ł Homogenous or unique products.
Ł mlockaded entry and exit.
Ł Imperfect dissemination of information.
Ł Opportunity for above-normal (economic) profits in
long-run equilibrium.
° xamples of Oligopoly
Ł ?ational markets for aluminum, cigarettes, electrical
equipment, filmed entertainment, ready-to-eat cereals,
etc.
Ł Ôocal retail markets for gasoline, food, specialized
services, etc.
 
° Overt and Covert greements
Ł Cartels operate under formal agreements.
0 Powerful cartels function as a monopoly.
Ł Collusion exists when firms reach secret, covert
agreements.
° nforcement Problem
Ł Cartels are typically rather short-lived because
coordination problems often lead to cheating.
Ł Cartel subversion can be extremely profitable.
Ł Detecting the source of secret price concessions can be
extremely difficult.
 
 
! 
° Cournot Oligopoly
° Cournot equilibrium output is found by
simultaneously solving output-reaction curves
for both competitors.
° Cournot equilibrium output exceeds monopoly
output but is less than competitive output.
 
   ! 
° mertrand Oligopoly: Identical Products
Ł The mertrand model focuses upon the price reactions.
Ł The mertrand model predicts a competitive market
price/output solution in oligopoly markets with
identical products.
° mertrand Oligopoly: Differentiated Products
Ł The mertrand model demonstrates how price-setting
oligopolists profit with differentiated products.
"#  

° Sweezy model predicts ³sticky´ prices.
° Sweezy model explains why prices in oligopoly
markets sometimes fail to respond to marginal
cost change.
     
u


Number Power of
Market Type of Barriers Non-price
Examples of firm over
structure product to entry competition
producers price

Parts of
Perfect
agriculture are Many Standardized None Low None
competition
reasonably close

Advertising and
Monopolistic
Retail trade Many Differentiated Some Low product
competition
differentiation

Advertising and
Computers, oil, Standardized or
Oligopoly Few Some High product
steel differentiated
differentiation

Consider-
Monopoly Public utilities One Unique product Very high Advertising
able