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Chapter 8
Imperfect Competition
© 2001 South-Western College Publishing
Monopoly
A market structure in which only
one producer or seller exists for a
product that has no close substitutes
2
Characteristics of Monopoly
 Degree of control over price that is held
by the monopolist
 Individual supply of the monopolist
coincides with the market supply
 Market demand equals the demand for
the product/service
 Monopolist is a “price maker”
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Sources of Monopoly
Economies of Scale
Natural Monopolies: Public Utilities
Control of Raw Materials
Patents
Competitive Tactics
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Determining Monopoly Price
 Monopolist’s demand curve slopes
downward to the right because it is the
market demand curve of all consumers
 Relationships between the monopolist’s
cost and revenue curves
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Monopolist’s Demand Curve
Price
$12
10
8
D
0
900
1,000
1,100
Units
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Price
Cost
and
Cost and Revenue Curves
for a Monopoly
$20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
ATC
MC
B
B
P
Pure
Profit
C
AR
A
Q
10 11
1
12
2
3
13
4
5
MR
6
7
8Quant
9
ity
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Monopolistic Competition
Market structure in which relatively
many firms supply a similar but
differentiated product, with each
firm having a limited degree of
control over price
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Product Differentiation
Establishment of real or imagined
characteristics that identify a firm’s
product as being unique
Vs.
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Substitution Effect
 Change in quantity demanded of a
good due to change in price relative to
substitute goods
 Increased sales at the expense of other
firms
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Short-Run Cost and Revenue Curves: Possible
Equilibrium under Monopolistic Competition
(a)
(c)
(b)
$
$
MC
$
MC
S
ATC
ATC
AR
AR
D
MR
0
0
Quant 30,000
ity
Industry
Quant
ity
Short-Run
Economic Profit
MR
0
28,000
Quant
ity
Long Run
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Oligopoly
Market structure in which relatively
few firms produce identical or
similar products
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Possible Demand Curves for an Oligopolist
Price
D1
D
P
P
D
D1
Q
Quant
ity
13
Administered Price
A predetermined price set by the
seller, rather than a price solely
determined by demand and supply
in the marketplace
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Cartel
An organization of independent
firms that agree to operate as a
shared monopoly by limiting
production and charging
the monopoly price
15
Three-Firm Cartel
Price
P
Firms
2+3
Market
Share
Firm 1
Market
Share
MC1
Dc
MR1
q1
d1
Qc
Quant
ity
16
Measurements of Concentration
 Concentration Ratio: Measure of market
power calculated by determining the
percentage of industry output accounted
for by the largest firms
 Herfindahl Index: Measure of market
power calculated by summing the squares
of the market shares of each firm in the
industry
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Perfectly Competitive vs. Monopolistic
Pricing: Possible Long-Run Price Under
Price
Cost
and
Monopolistic Competition
MC
AC
A
P
C
P
D´(MR´ and AR´)
B
AR
MR
0
Q
Q
Quant
ity
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Possible Equilibriums under Perfect
Competition and Monopoly or Oligopoly
$
MC
$
MC
ATC
ATC
AR
and
MR
AR
MR
0
100,000
Perfect
Competition
Q
0
500,000
Q
Monopoly or
Oligopoly
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Competition Among Consumers
 Monopsony: Market structure in which there
is a single buyer
– ex., rural area granary
 Oligopsony: Market structure in which there
are only a few buyers
– ex., commercial jet aircraft
 Monopsonistic Competition: Market
structure in which there are many buyers
offering differentiated conditions to sellers
– ex., toy manufacturers
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Market Structure in the U. S.
Bilateral Monopoly:
Market structure where only a single buyer
exists on one side of a market, and only
one seller (the monopolist) exists on the
other side
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Antitrust Laws
Sherman Antitrust Act - outlaws
restraint of trade and any attempt to
monopolize
Clayton Act - outlaws certain business
activities not covered by Sherman Act
Federal Trade Commission Act created the FTC to police unfair business
practices
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Activities Prohibited by the Clayton Act
 Price Discrimination
– charging different customers different prices for the
same good
 Tying Contracts
– contracts requiring the buyer of a good to purchase
another additional good
 Exclusive Dealing
– requiring buyers of goods to agree not to purchase
from competing sellers
 Interlocking Directorates
– boards of directors of competing firms with one or
more members in common
 Predatory Pricing
– selling at unreasonably low prices to destroy
competition
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