Eco 9/2

Monopoly, Oligopoly, Monopolistic Competition

Imperfect Competition

Most industries represent imperfect competition.

1. Monopoly2. Oligopoly3. Monopolistic competitionThey differ on the basis of how

much competition and control over price the seller has.

Monopoly

Pure monopoly: most extreme form of imperfect competition. (Georgia Power)

Characteristics of a Monopoly

1. A single seller2. No substitutes3. No entry (The monopolist is protected

by obstacles to competition that prevent others from entering the market.)

4. Almost complete control of market price.

Barriers to Entry State laws prevent entry. Competing

electric, water companies are prevented by law from entering the market.

High cost of getting started. “Excessive financial capital costs”

Ownership of essential raw materials. (DeBeers Company owns diamond mines in South Africa.)

Types of Monopolies

Natural monopolies Geographic monopolies Technological monopolies Government monopolies

Natural Monopolies

One company provides a public good or service- buses, utilities, cable tv.

It was thought one company would be more efficient through economies of scale. Gov’t is breaking them up through deregulation.

Economies of scale: low production costs resulting from large size of output.

Geographic Monopoly

Geographic factors prevent competition.(General store in a remote Alaskan village)

Technological Monopoly

A gov’t patent gives you exclusive right to manufacture, sell, rent your invention for # of years, usually 20.

A copyright protects art, literature, song lyrics, other creative works for life of the author + 70 years.

Government Monopoly

Construction, maintenance of roads and bridges are responsibility of gov’t.

Oligopoly

Industry dominated by several suppliers who exercise some control over price.

(Tobacco products, breakfast cereals, domestic motor vehicles, soft drinks)

Five Condition of an Oligopoly

1. Dominated by a few sellers2. Barriers to entry- capital costs are high,

hard to enter major markets.3. Identical or slightly different products4. Nonprice competition- advertising

emphasizes minor differences 5. Interdependence- any change in one

firm will change others in the oligopoly

Product Differentiation

Real or perceived differences in good or service that make it more valuable in consumers’ eyes.

Interdependent Behavior

Whatever one firm does, others follow. If one airline lowers prices, all others will

and it will ignite a price war. Collusion- competing firms in an

oligopoly secretly agree to raise prices or divide the market. (Federal crime)

Cartels

Form of collusion. Cartel- an arrangement among groups

of industrial businesses, often in different countries, to reduce international competition by controlling price, production, distribution.

Monopolistic Competition

Large number of sellers offer similar but slightly different products. (toothpaste, cosmetics, designer clothes)

Most common form of market structure in the U.S.

Five Conditions of Monopolistic Competition1. Numerous sellers2. Relatively easy entry. (Easier than in

a monopoly or oligopoly. Advertising is costly.)

3. Differentiated products- each seller sells slightly different product.

4. Nonprice competition5. Some control over price

Oligopoly vs. Monopolistic Competition

Oligopoly: few companies control an industry.

Monopolistic competition: many firms, no real interdependence, some slight differences between products.

Advertising

Even more important in monopolistic competition than in oligopolies.