PC: price taker, DD

perfectly elastic:
P=AR=MR, at prot
maximising level where
MR=MC, P=MC

Society value last unit P>MC at prot

of good produced more maximising level where
than its opportunity Allocative inecient: MR=MC
cost, welfare loss to produces at lower
output and higher Imperfect competition:
society, DWL
price, underallocation downward sloping
Greater price setting
of scarce resources demand (AR) curve,
ability, less price elastic
Better off if additional price setter
demand curve, steeper
units produced AR curve, price greater
Allocative eciency than MC to a greater
Compete in terms of
price cutting and other extent
Incumbent domestic
non pricing strategies,
monopoly can face Globalisation and
advertising and
competition from big removal of protectionist Resources may be put
promotion, highly
foreign conglomerates barriers led to growth into more productive
differentiated products
that vie for a share of in international use
--> affect sales of
lucrative domestic competition
incumbent, need to
market
reduce X-ineciency to
However if provide
survive
better consumer
Productive eciency Advertising to
In spite of information, move
differentiate products
At prot max ineciencies, monopoly market closer to PC
and increase market
Consumers enjoy equilibrium MR=MC, can be desirable in model in terms of
share -- may be seen as
benets of lower prices higher output and industries where perfect information
a form of economic
with huge iEOS in a lower price compared to substantial iEOS can be waste
monopoly perfectly competitive reaped, LRAC falls over
Misallocation of
industry a large range of output,
Monopoly Economic eciency resources, competitive
lower AC, lower MC
oligopoly, resources can
be used to produce
Consumers suffer from more goods and
exploitive pricing services

Exacerbate inequity, supernormal prots Firm in imperfect

concentrated in the hands of a selected few Equity competition settle at LR
monopolies who can block potential entrants equilibrium level that is
iEOS not fully exploited,
Productive eciency not necessarily at the
productive inecient
minimum LRAC, operate
However consumer surplus needs not necessarily at downward sloping
be reduced when enjoy substantial iEOS portion of LRAC curve

Argued that in very LR, Monopolies and

no BTE due to change in Criteria for assessing oligopolies can afford to
level of technology performance/ X-eciency be X-inecient because
Possible LR supernormal prots, able to reinvest
desirability ability to retain LR
into R&D especially with threat of potential
supernormal prots
entrants Dynamic eciency
Strong incentive to
break through market
from entrants
Fairness in distribution
Dynamic eciency of wealth, income and
May not have incentive because dominant position is opportunities
secured, less need (unless theory of contestable markets)
Equity

Idea of equitable
May erode value of monopolist's existing products, distribution is
tend to favour status quo normative

Tend to spread opportunities and wealth widely Consumers able to

and more evenly, prots spread evenly among choose from a wide
many small rms because no BTE variety of products +
Consumer choice
purchase similar goods
from different
Consumer surplus max producers
at equilibrium price Equity
where P=MC
"Excess capacity
theorem": attempts at
PC markets do not rectify pre-existing Not productively productive
Argue if there is merit
inequity, retain old structure of ecient, producing at differentiation incurs
in product
inequitable wealth distribution the falling portion of costs, results in rms
Assessing performance differentiation
the LRAC curve producing at higher
across different market
average cost than
Normal prots, structures
necessary
restricted R&D which
requires high MPC
expenditure Incentive to innovate
Dynamic eciency but easy to copy tech +
LR normal prots
But in reality often
engage in innovation to
Homogeneous products Perfect competition
improve quality and Enhances consumer
makes innovation to Dynamic eciency
earn higher prots in SR choice
improve quality of
product an irrelevant
discussion
Competition key driver Anti-competitive
of innovation behaviour such as
collusion and practice
Equity of price discrimination
Perfect information: innovations quickly replicated by often serve to further
competitor/ new rms, discourage R&D, no benets reduce consumer
surplus

Does not offer

consumer choice in Supernormal prots,
terms of product capable
variety but choice of
many producers Consumer choice
Existing competition
amongst few dominant
There is consumer Reduce fear of rival's
rms induces
sovereignty reactions to their
investment in R&D to
pricing strategies
Oligopoly Dynamic eciency differentiate products
(non pricing strategy)

Pace can be slow in

collusive/ entrenched
oligopolies - lack of
Perfectly contestable competition deter R&D
market when entry into like monopoly
and exit from market by
potential rivals is
costless and can be Also limits consumer choice to existing dominant
done rapidly rms in the market because of advertising

Contestable markets
Consumer choice
Key conditions Tends to engage in multiple branding whereby rm
1. no sunk costs and exit costs, capital equipment is produces same products packaged under different
transferable brand names -- false illusion of consumer choice
2. perfect information and ability of all suppliers to use
the best available production tech in the market
3. low consumer loyalty
Theory of contestable markets: what is
crucial in determining price and output is
Hit and run competition presence of real threat of competition

Economists theorise that this is new way to encourage

rms to act like perfect competitors + shows that
inecient rms cannot survive + why rms act
competitively despite market structure as long as
market is contestable