Imperfect Competion Final (2)

8/3/2019 Imperfect Competion Final (2)

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IMPERFECT COMPETITION

Presented By: -Abhishek Sharma

Dilip Margam

Koushik Gupta

Jayashree

Jobin Joy


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Dr. Manmohan SinghWas born on Sep 26th, 1932

Earned first class honours degree

in economics in 1957

Did Ph.d in economics fromOxford University

Joined Govt. Of India as economicadvisor in 1971

Awarded Padma Vibhushan in

1987


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IMPERFECT COMPETITION

In economic theory, imperfectcompetition is the competitivesituation in any market where the

conditions necessary for perfectcompetition are not satisfied.


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Forms of imperfect competitioninclude:Monopoly, in which there is only one seller of a good.

Duopoly, in which there are two seller of a good.

Oligopoly, in which there is a small number of sellers.

Monopolistic competition, in which there are many sellersproducing highly differentiated goods.

Monopsony, in which there is only one buyer of a good.

Oligopsony, in which there is a small number of buyers.

Information asymmetry when one competitor has the

advantage of more or better information.


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MONOPOLYMonopoly is said to

exist when one firm isthe sole producer or

seller of a product

which has no close

substitute.


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FEATURES OF MONOPOLYSingle seller in the market

No close substituteNo competition

Price maker

Monopoly is also an industryDifficult entry of new firms

Can fix both price and output by himself


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Y

XO

P

R

MC

MOutput

Price

MR

AR

AC

E

A

Long Run Normal Profit


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Long Run Normal LossY

XO

E

PB

R

MC

AC

MOutput

Price

MR

A

AR

AVC

E


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Short Run Super-Normal ProfitYY

XO

E

P

BR

MC

AC

MOutput

Price

Super-Normal Profits

MR

A

AR


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Y

XO

P

R

MC

MOutput

Price

MR

AR

AC

E

A

Short Run Normal Profit


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Short Run Normal LossY

XO

E

P B

R

MC

AC

MOutput

Price

MR

A

AR

AVC


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Comparison Between MonopolyAnd Perfect CompetitionPERFECT COMPETITION MONOPOLY

Price determined by intersectionof demand and supply curve

Producer has control over price

AR is perfectly elastic andhorizontal

AR is downward sloping

Price higher for a short term but

later becomes equal.

Monopolist always sell the product

higher than the Average cost

Supernormal profits do not occurin long run

Supernormal profit occurs even inlong run.


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COMPARISONPERFECT

COMPETITIONMONOPOLY

Government interfference is there. Government interference is not

there.

Price discrimination does not

occurs

Price discrimination occurs


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MONOPOLISTIC COMPETITIONMonopolistic Competition is a form of market structure in whichlarge number of independent firms are supplying products thatare slightly differentiated from the point of view of buyers.

The products of the competing firms are close but not perfectsubstitutes because buyers do not regard them as identical.

Each firm is, therefore, the sole producer of a particular brandor product. It is a monopolist as far as that particular product isconcerned.


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Since the various brands are closesubstitutes, a large number of monopoly

producers of these brands are involved inkeen competition with one another.

This type of market structure, where there

is competition among large number ofmonopolists is called MonopolisticCompetition.

Contd.


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Assumptions In Analyzing FirmBehaviourThe demand curve of each individual firmhas the same shape(elasticity) and position(distance from the y-axis). We assume thedemand curve of all firms to be symmetrical.

The cost curves, both average and marginal,are symmetrical for each firms.


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The Short Run EquilibriumIn the short run, the firm can adopt an independent pricepolicy, with least consideration for the varieties producedand prices charged by other producers.

The firm being rational in determining the price for a givenproduct will seek to maximize total profits.

The demand curve is downward sloping.

The demand curve of the firm in a monopolisticallycompetitive market is however more elastic than that of afirm in a pure monopoly.


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The Long Run EquilibriumWhen firms in short run earn super-natural profits in amonopolistically competitive market, some new firms will be attractedto enter the business, as the group pertaining to the industry is open.

On account of rivals entry, the demand curve faced by the typicalfirm will shift to the origin and it will also tend to be more elasticbecause competition faced from an increasing close substitutes.

Gradually in the long run the firms demand curve becomes tangent toits average curve, the firm earns only normal profits.

In long period the firms cant make super normal profit.


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OLIGOPOLY


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OLIGOPOLY

Oligi which means few and Polien meanssellers.

Market structure in which there are a few sellersselling homogeneous or differentiated products tomany buyers.

The Term Oligopoly has been derived from two

Greek words.


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TYPES:Pure oligopoly: - The products producedby the firms are homogeneous ,today

pure oligopoly is not found.

Differentiated oligopoly: the productsproduced by the firms are closesubstitutes and in the present worlddifferentiated oligopoly is found.


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Characteristics:Few sellers

Homogeneous or differentiated product

Blocked entry and exit

Inter-dependence

Uncertainty

Advertising

Constant struggle

Price rigidity


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Kinked Demand CurveKinked demand curve is made of two

segments :

1.The relatively elastic demand curve.2.The relatively inelastic demand curve.

The curve have more elastic demand abovethe kink point and less elastic below it.


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Kinked demand curvePrice

Quantity

D = elastic

D = Inelastic

5

100

Kinked D Curve

The principle of the kinked demandcurve rests on the principlethat:

a. If a firm raises its price, itsrivals will not follow suit

b. If a firm lowers its price, itsrivals will all do the same

Assume the firm is charging a price of5 and producing an output of 100.

If it chose to raise price above 5, itsrivals would not follow suit and the firmeffectively faces an elastic demand

curve for its product (consumers wouldbuy from the cheaper rivals). The %change in demand would be greaterthan the % change in price and TRwould fall.

Total Revenue A

TotalRevenue B

If the firm seeks to lower its price togain a competitive advantage, its rivalswill follow suit. Any gains it makes willquickly be lost and the % change indemand will be smaller than the %

reduction in price total revenuewould again fall as the firm now facesa relatively inelastic demand curve.

Total Revenue B

Total Revenue A

The firm therefore, effectively facesa kinked demand curve forcing it to

maintain a stable or rigid pricingstructure. Oligopolistic firms mayovercome this by engaging in non-

price competition.


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Pattern of behaviour in Oligopolisticmarkets: -

Cartel

Price leadership


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CartelExisting firms forms an agreement.

Cartels are formed to enjoy a monopoly power.

Its designed to earn profit to the collaborating firms.

Example:

OPEC International cartel in the worlds petroleum market.


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Price LeadershipA traditional leader in the oligopolymarket announces price changes fromtime to time which others follow. Thedominant firm may assume the priceleadership. There is barometric price

leadership when a smaller firm triesout a new price, which may or may notbe recognized by the larger firms.


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Types of price leadershipPrice leadership of a dominant firm:- One ofthe few firms in the industry, which produces alarge portion of product is selected as the leader.

Barometric Price leadership:-An oldexperience, largest firm assumes the role of acustodian and protect interest.

Aggressive price leadership:-Firm shows anyindependence, it is threatened with directconsequences.


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Factors depending price leadershipa) Dominance in the market.

b) Initiative.

c) Aggressive pricing.

d) Reputation.


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DUOPOLY

The word duo means two and pollen

means to sell.

Duopoly is a market situation in which

there are only two sellers producing andselling either identical or differentiatedones.


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Features of duopoly:It is a form of imperfect competition

Two sellers selling goods in the market.

The firms produce and sell either identical products ordifferentiated ones.

The two forms may either resort to competition orcollusion.

It is a simple form of oligopoly.


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PRICE DISCRIMINATION UNDERMONOPOLYMeaning: -It means charging different prices todifferent consumer of their product is calledpricediscrimination.

Monopoly firms have the sole objective of earningmaximum profits.

It is designed to increase the total profits.

They may charge uniform or different prices.


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Price Discrimination And EquilibriumOutput Of A Firm Under MonopolisticCompetition

A firm under monopolistic competition is a pricemaker.

Thus, unlike perfect competition, there ispricing problem.

Therefore the firm has to determine a suitableprice for its product which yields a maximumtotal profit.


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When Price Discrimination is possible?Legal sanction.

Preference of buyers.

Non transferability of goods.

Markets are separated by large distance.

NOTE:- Price Discrimination is found only under imperfectcompetition, especially in monopoly and not in perfect competition.


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Types of Price Discrimination

Personal Discrimination.

Age Discrimination.

Quality variation Discrimination.Seasonal Discrimination.


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Equilibrium under price discrimination


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THANK YOU!!!!

Imperfect Competion Final (2)

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