Imperfect Competition (BE)

8/8/2019 Imperfect Competition (BE)

1/27

M. Jamshed Khan, Dept. of Economics, Edwardes College PeshawarM. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 11


2/27


MONOPOLYMONOPOLY

CHARACTERISTICSCHARACTERISTICS

(1)(1) Single SellerSingle Seller

It is a one firm industry. A single seller controlsIt is a one firm industry. A single seller controls

the whole of the supply of a product.the whole of the supply of a product.


3/27


MONOPOLYMONOPOLY

(2) No close substitute(2) No close substitute

The product of the firm is such that it has noThe product of the firm is such that it has nogood or close substitute in the market. Thegood or close substitute in the market. The

demand for monopolists product is,demand for monopolists product is,

therefore, inelastic.therefore, inelastic.


4/27


MONOPOLYMONOPOLY

(3) Control over price(3) Control over price

The monopolist, being the sole producer ofThe monopolist, being the sole producer ofthe product has a considerable control overthe product has a considerable control over

the price of the commodity.the price of the commodity.


5/27


MONOPOLYMONOPOLY

(4) Exclusion of Competitors(4) Exclusion of Competitors

In monopoly, there is exclusion ofIn monopoly, there is exclusion ofcompetitors which may be due to legalcompetitors which may be due to legal

restrictions on production or on account ofrestrictions on production or on account of

economies of scale or technologicaleconomies of scale or technologicaladvancement of the firm.advancement of the firm.


6/27


MONOPOLYMONOPOLY

(5) Publicity for sale promotion(5) Publicity for sale promotion

The monopolist being the sole producer of aThe monopolist being the sole producer of aproduct sparingly advertises for the sale ofproduct sparingly advertises for the sale of

the products.the products.


7/27


MONOPOLYMONOPOLY

BASES OF MONOPOLY POWERBASES OF MONOPOLY POWER

The main conditions which give rise toThe main conditions which give rise tomonopoly are called collectively, Barriers tomonopoly are called collectively, Barriers to

Entry. These barriers block the entry ofEntry. These barriers block the entry of

new firms into industry and thus createnew firms into industry and thus createmonopoly. The main bases of monopoly aremonopoly. The main bases of monopoly are

given.given.


8/27


MONOPOLYMONOPOLY

(1)(1) Ownership of essential raw materialOwnership of essential raw material

If a firm owns or controls the entire supplyIf a firm owns or controls the entire supplyof an essential raw material used in theof an essential raw material used in theproduction of a commodity, it then createsproduction of a commodity, it then createsa monopoly by keeping away thea monopoly by keeping away thecompetitors out of the industrycompetitors out of the industry

Example:Example: De Beers Company of SouthDe Beers Company of SouthAfrica has a monopoly over the supply ofAfrica has a monopoly over the supply ofdiamondsdiamonds


9/27


MONOPOLYMONOPOLY

(2) Patents and research(2) Patents and research

In order to encourage research for theIn order to encourage research for thecreation of a new product, the governmentcreation of a new product, the governmentgives patent and copy rights to thegives patent and copy rights to theinventors. The exclusive rights to aninventors. The exclusive rights to aninventor to produce and control a productinventor to produce and control a product

blocks the entry of new firms producing theblocks the entry of new firms producing thesame commodity. The inventor thus enjoyssame commodity. The inventor thus enjoysthe monopoly position for the life of thethe monopoly position for the life of thepatentpatent


10/27


MONOPOLYMONOPOLY

(3) State Ownership(3) State Ownership

If a government owns and operates aIf a government owns and operates a

business, a monopoly is then established.business, a monopoly is then established.For instance, Railways, Electricity, PostalFor instance, Railways, Electricity, Postal

service are controlled and operated by theservice are controlled and operated by the

Government of Pakistan. No potential firm isGovernment of Pakistan. No potential firm is

allowed entry in the above services. Stateallowed entry in the above services. State

has thus monopoly in these services.has thus monopoly in these services.


11/27


MONOPOLYMONOPOLY

(4) Economies of scale(4) Economies of scale

If a firm using modern technology and heavyIf a firm using modern technology and heavyinvestment enjoys the increasing returns toinvestment enjoys the increasing returns toscale, it will produce goods at low unit costs.scale, it will produce goods at low unit costs.The new firms being unable to reap theThe new firms being unable to reap theeconomies enjoyed by the existing firm willeconomies enjoyed by the existing firm will

not enter the industry. The big firm willnot enter the industry. The big firm willcontinue controlling the entire supply of acontinue controlling the entire supply of acommodity in the market.commodity in the market.


12/27


MONOPOLYMONOPOLY

(5) Unfair competition(5) Unfair competition

If a firm or a few firms form a unifiedIf a firm or a few firms form a unified

business organization, then they possesbusiness organization, then they possessufficient economic power to eliminate thesufficient economic power to eliminate the

entry of would be firms in the industry.entry of would be firms in the industry.

The firm or some firms joining togetherThe firm or some firms joining togetheradopts price cutting tactics, put pressure onadopts price cutting tactics, put pressure on

resource suppliers, pay higher wages toresource suppliers, pay higher wages to


13/27


MONOPOLYMONOPOLY

skilled workers etc. and thus try to bankruptskilled workers etc. and thus try to bankrupt

the competitors. If they are successful inthe competitors. If they are successful intheir mission, unfair competition then givetheir mission, unfair competition then give

rise to monopoly.rise to monopoly.


14/27



15/27


MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION

In between the two extreme marketIn between the two extreme market

situations of perfect competition andsituations of perfect competition andmonopoly there is a most common type ofmonopoly there is a most common type of

market model called monopolisticmarket model called monopolistic

competition.competition.


16/27




(1)(1) Multiplicity of buyers and sellersMultiplicity of buyers and sellersJust like perfect competition there isJust like perfect competition there is

multiplicity of sellers in a market. The firmmultiplicity of sellers in a market. The firm

act independently and produce a smallact independently and produce a smallshare of the total output.share of the total output.


17/27



(2) Product differentiation(2) Product differentiation

One of the important feature of monopolisticOne of the important feature of monopolisticcompetition is that the firm producecompetition is that the firm producedifferentiated products. The difference in thedifferentiated products. The difference in theproduct is created by physical difference orproduct is created by physical difference orby competitive advertisement or by showby competitive advertisement or by show

appeal, or by location or package or byappeal, or by location or package or byservice facilities, et. The firm tries to createservice facilities, et. The firm tries to createa small island of monopoly in a sea ofa small island of monopoly in a sea ofcompetitioncompetition


18/27



(3) Control over price(3) Control over price

A firm has only a limited control over theA firm has only a limited control over the

price of its product. If the number of firmsprice of its product. If the number of firmsproducing a similar commodity are many,producing a similar commodity are many,

the demand for the product of the firm isthe demand for the product of the firm is

elastic. The firm will not be in a position toelastic. The firm will not be in a position to

raise the price of the product evenraise the price of the product even

modestly.modestly.


19/27



If the degree of product differentiation is inIf the degree of product differentiation is in

favour of the particular firm, then it canfavour of the particular firm, then it canslightly raise the price and the loyalslightly raise the price and the loyal

customers will continue purchasing thecustomers will continue purchasing the

product of the particular firm.product of the particular firm.


20/27



(4) Entry of new firms(4) Entry of new firms

The entry of new firms is easy in the market.The entry of new firms is easy in the market.

The new firm can secure its share in theThe new firm can secure its share in themarket by popularising its product throughmarket by popularising its product through

radio, television, newspaper etc.. The moreradio, television, newspaper etc.. The more

the consumers are convinced of thethe consumers are convinced of the

superiority of the product , the higher will besuperiority of the product , the higher will be

its outlay.its outlay.


21/27



(5) Stiff competition(5) Stiff competition

There is stiff competition among the firms forThere is stiff competition among the firms forthe sale of a particular brand not only inthe sale of a particular brand not only in

price, but also in the quality of the product.price, but also in the quality of the product.

The firms lay great emphasis on brandThe firms lay great emphasis on brandnames and trade marks.names and trade marks.


22/27



23/27


OLIGOPOLYOLIGOPOLY

The fourth market model, oligopoly, is aThe fourth market model, oligopoly, is a

compromise between monopoly andcompromise between monopoly and

monopolistic competition. The basicmonopolistic competition. The basic

characteristics of oligopoly are given...characteristics of oligopoly are given...


24/27


OLIGOPOLYOLIGOPOLY


(1)(1) A few sellersA few sellers

One of the important assumptions ofOne of the important assumptions ofoligopoly is the fewness. The firms whicholigopoly is the fewness. The firms which

control the market are few in number. Ascontrol the market are few in number. As

each firm produces a large share of theeach firm produces a large share of themarket, it is therefore in a position to affectmarket, it is therefore in a position to affect

the market price on its ownthe market price on its own


25/27


OLIGOPOLYOLIGOPOLY

(2)Quality of the product(2)Quality of the product

The oligopolist may be producing identicalThe oligopolist may be producing identical

products or differentiated product. In caseproducts or differentiated product. In casethe products are close substitute of onethe products are close substitute of oneanother, then the price cut by one firm willanother, then the price cut by one firm willbe followed by the rival firms. The oligopolistbe followed by the rival firms. The oligopolistin order to avoid mutual cut throatin order to avoid mutual cut throatcompetition often decide to divide thecompetition often decide to divide themarket. They increase or decrease themarket. They increase or decrease the

prices of the product as a groupprices of the product as a group


26/27


OLIGOPOLYOLIGOPOLY

(3) Entry to the market(3) Entry to the market

Though there are obstacles to the entry ofThough there are obstacles to the entry of

new firms in the market, yet the entry is notnew firms in the market, yet the entry is notcompletely blocked. If a firm is financiallycompletely blocked. If a firm is financially

sound and can start production on a largesound and can start production on a large

scale, the new firm can creep into thescale, the new firm can creep into the

oligopolistic industry.oligopolistic industry.


27/27


OLIGOPOLYOLIGOPOLY

(4) Expenses of advertisement(4) Expenses of advertisement

In case, the oligopolist producesIn case, the oligopolist producesdifferentiated product, then heavy amountdifferentiated product, then heavy amount

has to be channelised into advertising andhas to be channelised into advertising and

other sale promotion activities.other sale promotion activities.

Imperfect Competition (BE)

Documents

Transcript of Imperfect Competition (BE)