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Perfect Competition,
Monopoly, Oligopoly 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
 Homogenous product
 Free entry and exit (usually)
 Examples
 Wheat
 Milk
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
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?
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
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
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
5) INDICATORS OF COMPETITION
 Imports
 Substitutes
 Entry
 Countervailing power
 Other factors eg. dynamic factors such as
technology
 Vertical integration?
6) PUBLIC POLICIES
 Monopoly
1.
2.
3.
4.
Introduce more competition
Regulate behaviour
Public ownership
Competition for the market as opposed to
competition in the market
5. Take no action
 Collusion
 Cartel laws
 Price regulation
 Structural remedies