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Perfect Competition Number of firms Many firms

Monopolistic Competition Many firms (independent and small market shares)

Oligopoly Few firms (interdependent in setting price and business strategy)

Monopoly Single firm

Natural Monopoly Single firm (Similar to Monopoly but with decreasing avarage cost when produce more output. More producers result in signigicantly higher cost and detrimental to consumers.) No good(close) substitutes


Identical productsVery good Substitutes Perfectly elastic (horizontal)


Barrier to entry Nature of competition

Very low Price only

Pricing power


Good substitutes but Very good substitutes differentiated in quality, or differentiated in features and marketing quality, features, marketing, branding Downward-sloping Downward-sloping (highly elastic) (more or less elastic than Monopolistic Competition) Low High (beacause of large firms) -Price, marketing, Price, marketing, features. features, brand name -Too many firms collusion is impossible -Pay attention to average market price not individual prices. Some Some to significant (interdependent)

No good(close) substitutes



Very high Advertising

Significant high Advertising


Example of market

Market of wheat

Market of toothpaste

Shortrun:P=MCQ Profit maximization P>ATC: Eprofit>0 P<ATC: Eprofit<0 Longrun(equilibrium) P=(MC=ATC) Q* P=MR=AR=D ATC min Eprofit=0; No firm can earn Eprofit in long run Changes in demand: M.Demand Increase Peq Increase Qeq Increase Firm: +P.firm increase +Earn Eprofit increase scale + Many Firms enter M.Supply Increase +Peq Decrease +Qeq Increase Firm: +P.firm decrease +Q.firm decrase +Eprofit decrease

Short run: MR=MCQ* Q*&DP* P*>ATCEprofit>0 P*<ATCEprofit<0 Long run: Eprofit>0 More firms Dcurve decrease P=ATC Eprofit=0. Eprofit<0 Less firms Dcurve increase P=ATC Eprofit=0 Compare with perfect competition: +Qmc<Qpc +Pmc>Ppc +ATC not min

Market of automobile Source of monopoly power Copyrights, patents, control resources, supported by gorvenment Single Price: Tradeoff +Kinked Demand between price and curve model quantity (single price) +Cournot Model MR=MC Q* Q*&D P* +Nash equolibrium P* must > ATC Model Q*&ATC ATC* Eprofit= (P*+Stackberg ATC*)xQ* Dominant Firm Price discrimination: Model: Capture more consumer surplus and +Compare with economic profit perfect competition Condition for for price and Monopoly discrimination Pmon>Poli>Ppc Downward-sloping Qmon<Qoli<Qpc demand curve 2 groups of customers with different price elasticities of demand Prevent customers reselling products to the customers paying the higher price. Perfect price

Electric power

Price: MR=MCQ*<Qeff Q*&DP* Governemnt may regulate the prices that momopolies can charge: AC pricing ATC&DQac & Pac Qac>Qu Pac<Pu Eprofit=0 MC pricing (Efficient regulation) MC&DQmc & Pmc Eprofit<0loss sell the monopoly right to the highest bidder

M.Demand Decrease Peq Decrease Qeq Decrease Firm: +P.firm Decrease +Suffer Loss dncrease scale + Many Firms exit M.Supply Decrease +Peq Increase +Qeq Decrease Firm: +P.firm Increase +Q.firm Decrase +Eprofit Increase

discrimination: Monopolist can charge each consumer the maximum they are willing to pay No DWL Qmon = Qpc No consumer plus, all are producer surplus. Compare with Perfect competition Monopoly reduces consumer and producer surplus DWL Qmon < Qpc inefficient Pmon>Ppc Price discrimination : increase Qmon to Qpc decrease DWL reduce inefficiency.




Level of



of Firms Perfect competition Monopolisitic competition Oligopoly Monopoly

to Entry


Collusion Quantity Price