Download Monopolistic Competition

Price Discrimination
Price Discrimination: This occurs when firms sell the same product to different
consumers at different prices.
Price discrimination only occurs when price differences are based on different
buyers’ valuations of the same product.
If price differences are based on cost differences they are not discriminatory.
Two conditions for Price Discrimination :
• The firm must be a price maker or price setter.
• Consumers or markets must be independent.
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.
Monopolistic Competition
Each 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.
The main difference between monopolistic competition and monopoly lies in the
barriers to entry.
On the other hand, the essential difference between monopolistic competition and
perfect competition is found in the nature of the product.
Short – run Equilibrium of a Monopolistic firm
Short-run equilibrium of a monopolistic competitor is the same as that of a
monopolist, except that the demand curve for the product of the monopolistic
competitor is significantly more price elastic than that of the monopolist.
In the long run, monopolistically competitive firms earn normal profits only, just like
the perfectly competitive firm.
Short – 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.
The product may be homogeneous (e.g. steel, cement), but it is mostly heterogeneous
(e.g. motorcars, cigarettes, household appliances)
The main feature of oligopoly is the high degree of interdependence between the
firms. Interdependence refers to the degree to which the actions of one firm affect (or
are determined by) the actions of other firms.
Oligopoly-Kinked Demand Curve
Implications of the kinked demand curve
 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
The shortcomings of the kinked demand curve model are as follows:
 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.
QUIZ
A monopoly market has which of the following
characteristics?
A Firms are price makers
B There are a large number of small firms
C Quantity and price are set at their socially optimal levels
D There are few or no barriers to entry
QUIZ
Which of the following is a characteristic of monopolistic
competition?
A All of these answers
B There exists a perception of non-price differences between
products
C Few barriers to entry and exit
D Producers have some degree of control over price
MARKET STRUCTURES - SUMMARISED