Imperfect Competition

 

Oligopoly

1. Oligopoly: Small number of firms, some barriers to entry, unique products.

   1. Duopoly is a special oligopoly with only two firms producing a good.

2. Oligopolies are inefficient because they can create monopoly-like markets through collusion.

   1. Explicit collusion: Firms openly work together to make pricing or production decisions.

   2. Tacit collusion: Firms implicitly work together to make pricing or production decisions.

   3. Cartel: A combination of firms in the same market that work together to make pricing or production decisions.

   4. Collusion is illegal in the United States.

 

Monopoly

1. Monopoly: One firm, extreme barriers to entry, unique product.

2. Monopolistic competition: Large number of firms, low barriers to entry, unique products.

3. There are several possible reasons for a monopoly to occur:

   1. Exclusive control: Only one firm has access to the inputs needed to make the product.

   2. Natural monopoly: Because of economies of scale, the market may be best served by having only one firm because production costs increase when there are more firms.

   3. Patents and licenses: Inventions are patented so that others can’t produce the same thing, and licenses are given that limit the use of a particular resource or area.

4. Unlike a competitive firm, a monopoly’s MR does not equal the price of the market. They are two separate values at any given price level.

5. For a monopoly, MC = market supply.

6. Because there is no market competition, a monopoly can maintain profit levels by controlling supply at the level where MC = MR, thus controlling the price.

7. If the firm remains a monopoly, it can continue to make profits indefinitely.

8. Monopolies sometimes lose money in the short term, usually when they have up-front research or patent costs to incur.

9. As with a competitive firm, a monopolist should shut down if AVC is larger than the price.

10. Efficiency is lost with a monopoly because the consumer loses the surplus that would occur in perfect competition. The producer (monopoly) gains a part of what would have been the consumer surplus. The remainder becomes deadweight loss.

 

Government Regulation

1. Most government in capitalist countries set policies and regulations to prevent the occurrence of monopolies or any type of collusion that would be harmful to competition.

2. In the United States, these policies are called anti-trust policies. The major antitrust laws in the United States include:

   1. Sherman Anti-Trust Act (1890): Made price fixing and attempting to monopolize illegal.

   2. Clayton Anti-Trust Act (1914): Tried to keep monopolies from being created through mergers.

   3. Federal Trade Commission (FTC) Act (1914): Set up the FTC to enforce the Sherman and Clayton acts.