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Perfect Competition, Monopoly, O ligopoly and Monopolistic Competition in Seller Markers

Perfect Competition, Monopoly, O ligopoly and Monopolistic Competition in Seller Markers. Allan Fels, Professor of Government The Australia and New Zealand School of Government (ANZSOG). 1) PERFECT COMPETITION. Characteristics Many buyers and sellers, with no dominant firm

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Perfect Competition, Monopoly, O ligopoly and Monopolistic Competition in Seller Markers

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  1. Perfect Competition, Monopoly, Oligopoly and Monopolistic Competition in Seller Markers Allan Fels, Professor of Government The Australia and New Zealand School of Government (ANZSOG)

  2. 1) PERFECT COMPETITION • Characteristics • Many buyers and sellers, with no dominant firm • Homogenous product • Free entry and exit (usually) • Examples • Wheat • Milk

  3. 1) PERFECT COMPETITION • Behaviour and Pricing • Firms are price takers • Continual pressure to satisfy customer demand, minimise cost, innovate in order to survive • Collusion • Difficult: • Too many competitors to organise • If prices rise, there will be entry by competitors • Government induced collusion. The government may run the market as a cartel by • a) setting a minimum price; • b) restricting entry • Examples • Taxis • Doctors

  4. 2) MONOPOLY • Characteristics • Sole seller • No close product substitutes • Causes of monopoly • Entry barriers • Source of entry barriers • Monopoly of resources • Government regulation • Production process (natural monopoly) • Examples • Networks? E.g. telco, energy • Innovators?

  5. 2) MONOPOLY • Behaviour and prices • Assume profit maximisation occurs? Or less pressure to operate efficiently • Monopoly can determine its own price but in raising price it is at the expense of quantity • The concept of marginal revenue i.e. the addition to revenue from producing and selling one more unit • Monopoly produces up to the point where marginal cost equals marginal revenue • Profits tend to be “above normal” but accounting results can be a poor indicator of monopoly profits • Price discrimination requires • Monopoly • Different elasticities • Ability to separate the market

  6. 3) OLIGOPOLY • Characteristics • Few sellers • Interdependent • Pricing and behaviour • Note the relevance of game theory • Prisoners’ dilemma • Cooperation vs conflict • Cournot • Adjust price • Bertrand • Adjust quantity • Examples • Banks, oil companies, cement

  7. 4) MONOPOLISTIC COMPETITION • Characteristics • Many sellers • Product differentiation • Free entry • Examples • Books, CDs, films, computer games, restaurants, piano lessons, furniture etc • Behaviour • Free entry tends to prevent “excessive” profits

  8. 5) INDICATORS OF COMPETITION • Imports • Substitutes • Entry • Countervailing power • Other factors eg. dynamic factors such as technology • Vertical integration?

  9. 6) PUBLIC POLICIES • Monopoly • Introduce more competition • Regulate behaviour • Public ownership • Competition for the market as opposed to competition in the market • Take no action • Collusion • Cartel laws • Price regulation • Structural remedies

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