Imperfect Competition

12 Key excerpts on "Imperfect Competition"

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  Intermediate Microeconomics

  Neoclassical and Factually-oriented Models

  • Lester O. Bumas(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  these are the markets in which competitive behavior is found . Wheat growers do not take competitive actions to win over the customers of other wheat growers. Monopolists cannot acquire the customers of other producers since they are non-existent. Grocery stores and car manufacturers do compete for customers—sometimes by price and other times by non-price competition. Third and finally, the size of the market is important in determining whether a firm is an imperfect competitor, an oligopolist, or even a monopolist. The same supermarket is an imperfect competitor in a large city, an oligopolist in a small city which has only a few, and a monopolist in a town with only one.

  Imperfect Competition

  The concept of Imperfect Competition or monopolistic competition was independently propounded by Joan Robinson in her book, The Theory of Imperfect Competition , and Edward H. Chamberlin in his book, The Theory of Monopolistic Competition . Both books were published in 1933, the former in England and the latter in the United States. Both authors believed that their model better described the economy in general than the competitive model. Robinson and Chamberlin saw most producers as selling differentiated rather than standardized products. This gave them a measure of monopoly power. But that power is threatened by substitute products and the competition of other producers. Thus, firms generally had monopoly power threatened by competition.

  Market Characteristics

  Put in a more orderly fashion, the attributes of Imperfect Competition are the following: (1) There are many producers in the market. (2) There are many buyers in the market. (3) There is ease of entry into and exit out of the market. (4) The product is differentiated. (5) And firms face negative-sloping demand functions and have some price-setting power.

    The first three attributes of Imperfect Competition—many producers, many buyers, and easy entry and exit—are also characteristics of competitive markets. The crucial difference is the fourth element: Firms in competitive markets produce a homogeneous product but those in Imperfect Competition produce differentiated products. It is product differentiation which gives the imperfect competitor some control over the price of his product, some monopoly power. Control of price, of course, is a sign of the existence of a negative-sloping demand function. Finally, ease of entry implies the threat of additional competition—further limiting monopolistic power.

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  21st Century Economics: A Reference Handbook

  • Rhona C. Free(Author)
  • 2010(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  12 IMPERFECTLY COMPETITIVE PRODUCT MARKETS ELIZABETH J. JENSEN Hamilton College A ny introductory course in microeconomics spends a considerable amount of time examining perfectly competitive markets. It is important to understand this model; it serves as a benchmark for examining other industry structures and the welfare consequences of mov-ing away from perfect competition. However, it is also important to look at imperfectly competitive output markets—markets in which products are not perfectly homo-geneous or in which there are only a few sellers. While the perfectly competitive model assumes a large number of buyers and sellers, each of which is a price taker, the monopoly model assumes the opposite: one seller with complete control over price. Structurally, most markets are neither perfectly competitive nor monopolistic; they fall somewhere in between these two extremes of the competi-tive spectrum. The in-between markets are classified as either monopolistic competition or oligopolies depending on the number of firms in the market and the height of bar-riers to entry and exit. We turn first to monopoly. Monopoly A monopoly is the only producer of a good for which there are no close substitutes. This puts the monopolist in a unique position: It can raise its price without losing consumers to competitors charging a lower price. Thus, the monopolist is the industry and faces the downward-sloping market demand curve for its product. The monopolist can choose any point along that demand curve; it can set a high price and sell a relatively small quantity of output, or it can lower price and sell more output. Very few—if any—industries in the real world are pure monopolies. Examples of industries that come close include public utilities such as the local distributor of electricity or natural gas, the cable company in most communities, and, in a small isolated town, the local grocery store or gas station.

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  The Economics of Transport

  A Theoretical and Applied Perspective

  • Jonathan Cowie(Author)
  • 2009(Publication Date)
  • Routledge

    (Publisher)

  Chapter 7 Imperfect Competition in transport markets

  Learning Outcomes:

  On reading this chapter, you will learn about:

  • The imperfect market structures of monopoly and oligopoly and their high prevalence in transport markets
  • The main sources of barriers to entry into transport markets
  • The disadvantages and advantages of imperfect markets in the provision of transport services
  • The tendency for competitive transport markets to veer towards imperfect market structures through company mergers and acquisitions
  • One perspective of the process of competition and how industry structure may change and evolve over time.

  INTRODUCTION

  In this chapter the examination of competition within transport markets is further developed by introducing the idea of the imperfectly competitive market. A simple but highly accurate definition of such a market is one that breaches one or more of the assumptions of perfect competition. What this results in is a market that may have some form of competition, but that competition tends to be flawed in some respect. Consequently, operators within the market generally do not compete as fiercely as they would do in a situation of perfect competition. When left to the free market, historically most transport industries have tended towards these types of imperfect market structures, thus the two main forms, monopoly and oligopoly, are introduced in this chapter. In the course of the chapter we will also see that competition can take several different forms other than being based solely upon the price charged and/or the service offered, some of which are not always obvious as competitive strategies.

  In addition to the impact and effect of externalities, the issue of imperfectly competitive markets is the other major issue facing the organisation and provision of transport services. The consequences reach far beyond the direct issues covered in this chapter and extend to other matters such as the payment of subsidy, the regulation of operations and the question of private versus public ownership and control of transport services. This chapter will outline the problems as well as the potential advantages of imperfect markets in the provision of transport services. In the final section, the actual process of competition is examined, which attempts to address the question as to why so many transport markets tend towards this structure even where the best intentions of regulatory authorities have been that these markets should remain competitive. There are numerous examples where reforms have been almost wholly unsuccessful in delivering a competitive transport market in the long run. One of the principal reasons for this is that the underlying market structure, and more importantly market conduct, has proved to be far stronger than any government intervention. Understanding the basics of the competitive process is thus an important part in identifying the underlying characteristics that lead to such undesired outcomes.

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  Microeconomics For Dummies

  • Lynne Pepall, Peter Antonioni, Manzur Rashid(Authors)
  • 2016(Publication Date)
  • For Dummies

    (Publisher)

  Part IV

  Delving into Markets, Market Failure, and Welfare Economics

  Find free articles on hundreds of topics at www.dummies.com .

  In this part …

  Find out why consumers love perfect competition but firms may not.

  Get to grips with what welfare means in economics.

  Discover why monopolies produce less for a higher price.

  Understand how things change when one side of a market knows more than the other.

  Passage contains an image Chapter 11

  Stepping into the Real World: Oligopoly and Imperfect Competition

  In This Chapter

  Considering the criteria for an oligopoly

  Modeling firms’ strategic behavior in oligopoly

  Differentiating products to soften competition

  Oligopoly is the name economists give to a type of market with only a few firms (it comes from the Greek word oligos meaning few). The classic example of an oligopoly is the airline industry, where a few airlines compete among themselves for customers, and the bulk of the domestic market is locked up among the four largest competitors: American, Delta, United Airlines, and Northwest. But oligopoly is visible everywhere, in industries as different as cable television services, computer and software industries, cellular phone services, and automobiles.

  One of the ways in which economists analyze oligopoly is by comparing it with other market structures. Compared to perfect competition, described in Chapter 10 , consumers don’t get as good a deal. But compared to monopoly (which has no competition, see Chapter 13

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  Foundations of Real-World Economics

  What Every Economics Student Needs to Know

  • John Komlos(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Firms in a market dominated by a few large sellers are oligopolies. If there is just one seller then it is a monopoly. Such firms have sufficient market power to affect prices because of concentration of market share. Competition among such firms does not assure an efficient outcome. Instead, prices then exceed average unit cost and profits are generated. In addition, oligopolies and monopolies do not produce at the minimum of average cost. Therefore, they produce inefficiently in spite of competition. Imperfect Competition prevails because of strategic behavior or collusion, tacit or explicit.

  The mainstream argues that in the long run, firms will enter the market until the profits of oligopolies are competed away. However, that is inaccurate, because it does not specify how long that will take and therefore may not be pertinent in the relevant time frame. Existing firms try to keep competing firms from entering the market using advertising as a barrier to guarantee that potential competitors have to make a large lump-sum investment before they can become viable competitors and gain a sufficiently large market share to make it worthwhile for them to enter the industry. Alternatively, existing firms tweak their products sufficiently so as to avoid the long-run outcome. Besides, even if they were not earning a profit, oligopolies and monopolies are still inefficient, because the prices they charge for their product exceed marginal cost and because they still produce with excess capacity. The Walgreens around the corner is empty much of the time.

  Another form of Imperfect Competition is spatial monopoly, such as Walgreens or gas stations, since they have a monopoly on selling at a certain location. Yet, there is hefty competition, so most of them earn small profits. Nonetheless, it is an inefficient form of market organization insofar as there are too many gas stations and none of them is used at full capacity, leading to a misallocation of resources that could be put to other uses. That form of industrial organization dominates much of the retail sector: drugstores, restaurants, supermarkets, department stores, and similar brick-and-mortar firms are very competitive, are usually not great profit makers, and are inefficient.

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  Competition Policy

  Theory and Practice

  • Massimo Motta(Author)
  • 2004(Publication Date)
  • Cambridge University Press

    (Publisher)

  8 A Toolkit: Game Theory and Imperfect Competition Models 8.1 INTRODUCTION This chapter introduces the reader to Imperfect Competition models that are used in the technical sections of the book (specifically, the intermediate technical sections, labelled*; the advanced technical sections, labelled**, will likely need a stronger background than the one which is offered in this chapter). Of course, this is no replacement for more proper training in basic industrial organisation models, but the chapter should help some students who have already some background in economics and in simple mathematical analysis (I use little more than derivatives of real functions in the book and in this chapter), or those who want to refresh a knowledge acquired some time ago, to follow the formal arguments made in the book. The choice of the topics analysed here is functional, with the objective of helping the reader follow the book. The chapter starts with a short treatment of monopoly (Section 8.2), then introduces the reader to elementary game theory (Section 8.2.2.3), which is indispensable for understanding modern oligopoly theory, which for convenience 1 divide into static models (Section 8.3) and dynamic models (Sec- tion 8.4). 8.2 MONOPOLY This section offers an introductory treatment of monopoly pricing. First the case of a single-product monopoly and then that of a multi-product monopoly are analysed. 8.2.1 Single-Product Monopoly The easiest possible model of Imperfect Competition is one where there is a monop- olist that sells only one good. 1will first solve the monopolist's problem with general cost and demand functions, and then offer some specific examples. Denote demand for this good as q == D(p), where p is the price and q output, and assume that demand is negatively sloped: aD/a p < o. For later use, define the elasticity of demand £ as the percentage change in the quantity demanded by consumers that follows a one percent change in price: 533

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  A Course in Public Economics

  • John Leach(Author)
  • 2003(Publication Date)
  • Cambridge University Press

    (Publisher)

  Imperfect Competition results in a loss of economic efficiency even when resources are not squandered in this manner. An imperfectly competitive firm can earn profits by setting its price above marginal cost, whereas the competitive firm sets its price equal to marginal cost and earns no profits. The higher price dissuades consumers from buying the good, resulting in a movement along the production possibility fron-tier. Consequently, the condition for match efficiency is not satisfied under Imperfect Competition. Thus, Imperfect Competition could result in a loss of economic efficiency for two reasons. Resources could be wasted in the pursuit of profit, pushing the economy inside the production possibility frontier. Prices could be set too high, causing the economy to move to the wrong point on the frontier. Both of these issues are examined in the chapters that follow. 14 Monopoly The first theorem’s claim that every competitive equilibrium is Pareto optimal hinges upon the assumption that perfect competition prevails in the markets for both con-sumption goods and factors of production. Economists are much less sanguine about the efficiency of free markets when large firms dominate some of the markets. A firm’s domination of a market is most complete when it is the sole seller or sole buyer in a market, that is, when it is a monopolist or a monopsonist. This chapter examines some of the consequences of monopoly. 14.1 NATURAL MONOPOLY A production process displays increasing returns to scale if output more than doubles when the use of every input is doubled. The cost curves of a firm that produces under increasing returns to scale have two important properties 1 : • Average cost falls as output rises. • Marginal cost is everywhere below average cost. A market in which production is characterized by increasing returns to scale is said to be a natural monopoly because only one firm can survive in such a market.

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  Introduction to Game Theory in Business and Economics

  • Thomas J. Webster(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  175 C H A P T E R 8 Imperfect Competition In this chapter we will: • Discuss the price- and output-setting behavior imperfectly competitive firms; • Explore how game theory can be used to expand our understanding of strategic interaction between and among imperfectly competitive firms; • Review output-setting strategies using the Cournot model; • Review price-setting strategies using the Bertrand model; • Investigate the Bertrand paradox; • Discuss collusive price-setting behavior by imperfectly competitive firms. INTRODUCTION One of a firm’s most important decisions is how to price its product. A firm’s ability to affect the market-determined price of its product is referred to as market power. A firm with market power is called a price maker . An industry comprised of a single firm has the greatest degree of market power because it controls total industry output. In general, a firm’s market power is directly re-lated to its ability to shift the market supply curve. It may also be able to exercise market power by shifting the market demand curve by changing consumer behavior, such as through advertis-ing. A firm that does not have market power is referred to as a price taker . A price taker cannot significantly shift the market supply curve because its output is very small relative to the output of the entire industry. Price maker A firm with market power. Price taker A firm that does not have market power. Market power is a by-product of market structure , which refers to the nature and degree of competition in an industry. The most significant characteristic of market structure is the number of firms in an industry. In an industry consisting of a very large number of firms, an individual firm has little or no market power. In this case, product price is not a decision variable. Managers will maximize profits by minimizing production costs. At the other extreme, an industry consisting of a single firm has the most market power.

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  Managerial Economics

  • William F. Samuelson, Stephen G. Marks, Jay L. Zagorsky(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  Table 7.1 provides a preview of these different settings by considering two dimen- sions of competition: the number of competing firms and the extent of entry barriers. At one extreme (the lower right cell of the table) is the case of perfect competition. Such a market is supplied by a large number of competitors. Because each firm claims only a very small market share, none has the power to control price. Rather, price is determined by supply and demand. As important, there are no barriers preventing new firms from entering the market. At the other extreme (the upper left cell of the table) lies the case of pure monopoly. Here, a single firm supplies the market and has no direct competitors. Thus, as we shall see, the monopolist (if not constrained) has the ultimate power to raise prices and maximize its profit. Clearly, prohibitive entry barriers are a precondition for pure monopoly. Such barriers prevent rival firms from entering the market and competing evenhandedly with the incumbent monopolist. Oligopoly (shown in the second row of Table 7.1) occupies a middle ground between the perfectly competitive and monopolistic extremes. In an oligopoly, a small number of large firms dominate the market. Each firm must anticipate the effect of its rivals’ actions on its own profits and attempt to fashion profit-maximizing decisions in response. Again, moderate or high entry barriers are necessary to insulate the oligopolists from would-be entrants. Finally, monopolistic competition (not shown in the table) shares several of the characteristics of perfect competition: many small firms competing in the market and an absence of entry barriers. In this sense, it would occupy the same cell as perfect competition. However, whereas perfect competition is characterized by firms producing identical standardized products, monopolistic competition is marked by product differentiation.

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  Handbook of Labor Economics

  • Orley Ashenfelter, David Card(Authors)
  • 2010(Publication Date)
  • North Holland

    (Publisher)

  Chapter 11 Imperfect Competition in the Labor Market

  Manning Alan1 , Centre for Economic Performance, London School of Economics, Houghton Street, London WC2A 2AE

  Abstract

  It is increasingly recognized that labor markets are pervasively imperfectly competitive, that there are rents to the employment relationship for both worker and employer. This chapter considers why it is sensible to think of labor market as imperfectly competitive, reviews estimates on the size of rents, theories of and evidence on the distribution of rents between worker and employer, and the areas of labor economics where a perspective derived from Imperfect Competition makes a substantial difference to thought.

  Keywords

  Imperfect Competition; Labor markets; Rents; Search; Matching; Monopsony

  Introduction

  In recent years, it has been increasingly recognized that many aspects of labor markets are best analyzed from the perspective that there is some degree of Imperfect Competition. At its most general, “Imperfect Competition” should be taken to mean that employer or worker or both get some rents from an existing employment relationship. If an employer gets rents, then this means that the employer will be worse off if a worker leaves i.e. the marginal product is above the wage and worker replacement is costly. If a worker gets rents then this means that the loss of the current job makes the worker worse off—an identical job cannot be found at zero cost. If labor markets are perfectly competitive then an employer can find any number of equally productive workers at the prevailing market wage so that a worker who left could be costlessly replaced by an identical worker paid the same wage. And a worker who lost their job could immediately find another identical employer paying the same wage so would not suffer losses.

  A good reason for thinking that there are rents in the employment relationship is that people think jobs are a “big deal”. For example, when asked open-ended questions about the most important events in their life over the past year, employment-related events (got job, lost job, got promoted) come second after “family” events (births, marriages, divorces and death)—see Table 1 for some British evidence on this. This evidence resonates with personal experience and with more formal evidence—for example, the studies of Jacobson et al. (1993) and Von Wachter, Manchester and Song (2009) all suggest substantial costs of job loss. And classic studies like Oi (1962)

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  Barriers to Competition

  The Evolution of the Debate

  • Ana Rosado Cubero(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  The starting point could be John Bates Clark’s report of 1902, where he mentioned the convenience of some kind of market control. The second book of John Bates and John Maurice Clark published in 1912 is another example of the raised interest in reducing the market power of the big companies in order to maintain customer welfare. The controversy between Joe Bain and George Stigler about workable competition is included in this section, yet it is only the starting point of the Harvard School and the Chicago School debate. At that stage they exchanged ideas, which were published in the most relevant scientific magazines. It was an intellectual debate between them; no one else was included at this time, despite the lasting battle lines developed several years later. The main argument about how markets work, making Chicago and Harvard confront each other, still survives nowadays. It is dealt with in Chapter 4 of this book, this long fight centred around the convenience of state market intervention, which aren’t exactly regulation issues but yet still is about pursuing non-workable competition or unfair business. The third section tries to achieve the earlier theoretical support of the main barriers to entry as excess of capacity and advertising. We keep in mind the possibility of finding earlier references about barriers to entry at some point in the future. 1.1 Perfect Competition and Imperfect Competition: Including the firm in Marginalism Analysis. In Cournot’s 2 model, and according to his theory of oligopoly, when the excess of price over marginal cost approached zero as the number of like producers became large. Let the revenue of the firm be: qi·p and MC : marginal cost The equation for maximum profits for one firm would be p ⋅ q i ⋅ d p / d q = M C The sum of such n equations would be n ⋅ p + q ⋅ d p / d q = n ⋅ M C For n.qi = q the least equation may be

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  Microeconomics for MBAs

  The Economic Way of Thinking for Managers

  • Richard B. McKenzie, Dwight R. Lee(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  Thus our conclusions regarding the pricing and production behav-ior of firms in monopolistically competitive and oligopolistic markets are tentative at best. 8 Economists seeking to make solid, empirically verifiable predictions about market behavior rely almost exclusively on supply and demand and monopoly models. Although predictions based on those models may sometimes be wrong, they tend to be easier to use and may be more reliable than predictions based on models of imperfect competi-tion. Predictions aside, it is important to remember that most markets are imperfect. 9 The competitiveness of the capital market – including the market for entire firms – will act as a discipline on managers who might believe that they can take advantage of their discretionary authority. Capital markets also induce managers to find the most cost- effective methods of production. 10 The “law of unintended consequences” rules. People concerned with containing the ravages of pedophilia on children understandably want to control the difficult-to- understand and maybe perverse ways of pedophiles, but controls on hugging (and other forms of human touch available to children, especially to disadvantaged and emotionally deprived children) can themselves result in damage to millions, if not tens of millions, of children pedophiles never touch. Needless to say, economic analysis leads again to a need for carefully crafted balance in regulatory policies.

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