SAYRE | MORRIS
Seventh Edition
CHAPTER 11
Imperfect Competition
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11-1
LO1
Imperfect Competition
• A market structure in which producers are
identifiable and have some control over price
• Two forms:
1. Monopolistic Competition
2. Oligopoly
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11-2
LO1
Imperfect Competition
Product Differentiation
• Attempt to distinguish a firm’s products from
those of its competitors
• Firms often compete on basis other than price
• Logos, symbols, brand names, location, service,
product development
• Often involves extensive advertising
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11-3
LO1
Advertising
Benefits of Advertising
•
•
•
•
Provides the consumer with vital information
Enhances competition between firms
Lowers the prices of products
Finances magazines and television shows
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11-4
LO1
Advertising
Criticisms of Advertising
• Mostly not informative and wasteful
• Encourages concentration within industries
• Raises prices to the detriment of consumers
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LO2
Types of Imperfect Competition
Monopolistic Competition
• a market in which many firms sell a
differentiated product and have some control
over price
Oligopoly
• a market dominated by a few large firms
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11-6
LO2
Measuring Industry Concentration
Concentration Ratio
•
The percentage of an industry’s total sales that
is controlled by the largest few firms
• 4-firm concentration ratio: % of sales revenue
by 4 largest firms in industry
• If < 40% may be monopolistic competition
• If > 40% likely oligopoly
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11-7
LO2
4 Firm Concentration Ratios
Industry
1990
2005
Motor Vehicles
87.2%
Petroleum
75.6
99.9
Tobacco
98.8
99.8
Cement
72.0
99.7
Fertilizers
56.7
99.4
Tires
86.2
99.3
Breweries
90.6
99.2
Sugar and Confectionary
47.8
98.7
Household Appliances
61.6
98.5
Coffee and Tea
76.5
97.8
Sporting and Athletic Goods
22.7
92.8
Wineries
48.5
92.2
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100.0%
11-8
LO3
Monopolistic Competition
Characteristics
•
•
•
•
Many small firms acting independently
Freedom of entry
Products are differentiated
Each firm has some control over price
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LO3
Monopolistic Competition
• May have economic profit in the short run
• In the long run, the representative firm in a
monopolistically competitive market makes only
normal profits
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11-10
Monopolistically Competitive
Equilibrium (SR)
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LO2
11-11
Monopolistically Competitive
Equilibrium
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LO2
11-12
LO2
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11-13
LO3
Appraisal of Monopolistic Competition
• produces a lower output than a perfectly
competitive firm
• does not achieve productive efficiency because
the long-run equilibrium price does not equal
minimum average total cost
• charges a higher price than a perfectly
competitive firm
• does not achieve allocative efficiency because
price exceeds marginal cost
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11-14