• Returns to scale refers to the percentage change in output from a given percentage change in ALL inputs. – Long-run idea[r]
(1)Monopoly, Oligopoly, and Monopolistic Competition
(2)Learning Objectives
1 Distinguish among three types of imperfectly
competitive industries and describe how imperfect competition differs from perfect competition
2 Identify the five sources of monopoly power and describe why economies of scale are the most enduring of the various sources of market power Apply the concepts of marginal cost and marginal
revenue to find the output and price that maximizes a monopolist's profits
4 Explain why the profit-maximizing output level for a monopolist is too small from society's perspective
5 Discuss why firms offer discounts to buyers who are willing to jump a hurdle
(3)Imperfect Competition
• Imperfectly competitive firms have some ability to set their own price: they are price setters
– Long-run economic profits possible
– Reduce economic surplus
• Three types:
1. Monopoly has only one seller, no close
substitutes
2. Monopolistic competition has many firms
producing slightly differentiated products that are reasonably close substitutes
3. Oligopoly has a small number of large firms
(4)Monopolistic Competition
Monopolistic Competition
Number of
Firms Many firms
Price Limited flexibility
Entry and Exit Free
Product Differentiated
Economic
Profits Zero in long run
Decisions differentiationP, Q, product
Perfect Competition
Many firms Price taker
Free
Standardized Zero in long run
(5)Oligopoly
Oligopoly
Number of
Firms Few firms, each large Price Some flexibility Entry and
Exit Difficult
Product Differentiated or standardized Economic
Profits Possible
Decisions P, Q, differentiation, advertising
Perfect Competition
Many firms Price taker
Free
Standardized Zero in long run
(6)Imperfect Competition
• Examples of monopoly
– Electricity and Magic Cards
• Examples of monopolistic competition
– Retail gas stations
– Convenience stores
• Examples of oligopoly
– Wireless phone service
– Cement
(7)The Essential Difference
• Market power is the firm's ability to raise its price
without losing all its sales
• Any firm facing a downward sloping demand curve
– Firm picks P and Q on the demand curve
• Market power comes from factors that limit
(8)Five Sources of Market Power
1 Exclusive control over inputs Patents and copyrights
3 Government licenses or franchises
(9)Market Power: Economies of Scale
• Returns to scale refers to the percentage change in output from a given percentage change in ALL inputs
– Long-run idea
– Constant returns to scale: doubling all inputs
doubles output
– Increasing returns to scale: output increases by
a greater percentage than the increase in inputs
• Average costs decrease as output increases
(10)Market Power: Network Economies
• Network economies occur when the value of the product increases as the number of users increases
– VHS format for video tapes, Blu-ray for DVDs
– Telephones
– Windows operating system
– eBay