Lecture 12 Imperfect Competition

1. Lecture 12Imperfect Competition

2. Various Forms of Imperfect Competition Monopoly(most inefficient and most extreme imperfection) • The only supplier of a unique product with no close substitutes in the market. Oligopoly (more efficient than a monopoly) • If there are few firms in the market and each firm is producing close substitute product then we have oligopoly. Monopolistic Competition(closest to perfect competition) • A large number of firms that produce differentiated products that are reasonably close substitutes for one another.

3. Characteristics of Monopoly • A monopoly has the following characteristics: • A monopoly is the only seller in the market. • It is price maker that means it has full control over how much price it will charge for a product. • There is barrier to entry and exit in the market it is operating. Example: WASA

4. Demand Curve faced by a Monopolist • A monopolist face a downward sloping market demand curve. ( whereas in perfect competition we have seen that a firm faces a horizontal demand curve) . Why? • The monopolist is the only provider in the market so it faces the whole market/industry demand curve which is downward sloping. The downward-sloping demand curve means that if the monopolist wants to sell more, it must lower its price. So this means if the monopolist charges a high price it can sell a small output but if it charges a low price it can sell a large output.

5. Choosing Price or Quantity • A monopolist is a price maker that means it can charge any price that it wants. But in that case it cannot determine how much it can sell in the market. So there can be two options for a monopolist: • Monopolist choose price and market determines the output it can sell: A monopolist can charge a price for its product and the market demand will determine how much it can sell in the market that means it cannot decide about the output. For example if the monopolist charge a price then it can sell a large output if the market demand is high. But it will sell a small output if the market demand is low. • Monopolist chooses the output it wants to sell and market determines the price of the product: A monopolist can decide how much output it wants to sell but in this case it cannot determine the price. Price will be determined by the market demand. So we can conclude that the monopolist cannot decide about both price and quantity of the product at the same time. It can only choose one and the market decides the other. In contrast, in perfect competition a firm cannot influence the price, it can only decide how much it wants to produce.

6. Demand Marginal revenue Monopoly’s Demand and Marginal Revenue Curves Because the monopolist must lower price to sell more, the extra or marginal revenue it gets from selling another unit is less than the price it charges. Thus, its marginal revenue curve lies below its demand curve. So P> MR Price 11 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 Quantity of Water -1 -2 -3 -4

7. Price 2. ...and then the demand 1. The intersection of the curve shows the price marginal-revenue curve consistent with this quantity. and the marginal-cost curve determines the profit-maximizing Monopoly quantity... price Marginal cost Profit Maximization of a Monopoly B Average total cost A Demand Marginal revenue 0 QMAX Quantity

8. Monopoly price Monopoly profit Average total cost The Monopolist’s Profit Price E B Marginal cost Average total cost D C Demand Marginal revenue 0 QMAX Quantity

9. Price Discrimination • Price discrimination is the practice of selling different units of the same good at different prices to different customers. A monopoly can increase its profit by discriminating price. Price can be discriminated across output and across consumers. • Price discrimination across output means a monopolist can charge low unit price to a customer if he buys a large amount of a good and he can charge high unit price if the customer buys small amount of the good. So any customer will be given a discount if he buys larger amount of a good. • Price discrimination across consumers means a monopolist will charge different prices to different types of consumers. For example: Students are given discount in bus fair.

10. Types of Price Discrimination • There are three types of price discrimination depending on how price is discriminated ( that means whether price is discriminated across output or across consumers or both) First Degree Price Discrimination: Monopolist discriminates price both across quantity and consumers. So here monopoly will charge different price to different customers and also those customers who buy more will get discount ( lower unit price) Second Degree Price Discrimination: Monopolist discriminates price only across quantity. That means the customers who buy more get a discount. Example: bulk buy Third Degree Price Discrimination: Monopolist discriminates price only across consumers. Example: Student discount in bus fair ( If you are a student you give low bus fair compared to other passengers)