Imperfect Competition

 It is very common
There are few seller Product differentiation and price war

Demand curve slopes downward form left to right

It is based on increasing return to scale

 Physical Features
Location

Services
Product Image

Y S Price A MC

E MR O Q Quantity

X
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 One seller and many buyer

No close substitute of product Monopolist can either fix price or

supply Price discrimination Barriers on entry

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 When the monopolist charges different price form different consumer or places for the same product. Price discrimination is made possible by three factors:
Consumers preferences

The nature of the product

Distance and frontier barriers
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 First Degree Price Discrimination

Each consumer is charged the maximum price he would be

willing to pay for each individual unit consumed.

Second Degree Price Discrimination
Firms charge a different price for each set of units sold.

Third Degree Price Discrimination

Price charge on the basis of elasticity of demand.

 A single firm is able to meet the

demand for the entire market. This happens more when there are increasing returns to scale.

 Proposed by Charmberlin and Robinson

Combination of perfect competition and monopoly Product differentiation

Products are close substitute

 Real:
When the inherent characteristics of the product are

different.
Fancied:
When the products are basically same. Product

differentiated through advertisement, difference in packing, design, or brand name.

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 Few firms produce either a homogenous product or

products which are close substitute but not perfect If there are two firms than it called Duopoly Firms are interdependence in decision making Much non price competition Barriers to entry Pricing decisions depend on the demand condition, the cost condition and the price strategies of competitor
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 Oligopolies have the following characteristics:

Interdependence in decision making Sticky prices Much non-price competition

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 All the firms under non-collusive oligopoly assume a

certain pattern of reaction of competitors in each period despite the fact that the expected reaction does not in fact materialize. Models of non-collusive oligopoly
Cournots Model of Duopoly
Sweezys Kinkded Demand Curve Model

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 A market with two sellers and a large number of buyers

Assumptions:

Two firms selling a homogenous product in the market Existence of a large number of buyers in the market Total cost of production is constant for each dupolist Firm wants to maximise profit assuming that its competitors output is constant Both the firms face a linear downward sloping demand curve Firm accepts the price at which total planned output can be sold Mutual interdependence

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 It is developed by Hall, Hitch and Sweezy.

It explains the interdependence of the firms in an

oligopoly It explains the sticky price level of oligopolistic market

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Y d Price

D
O Q Quantity X
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 Cartels are formed when competing oligopolists enter

into some kind of an agreement in order to maximize joint profit. There are two types of cartels Cartels aiming at joint profit maximization Cartels aiming at the sharing of the market

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 Direct agreement with the aim of reducing uncertainty

arising form their mutual interdependence. Aim to maximize the joint profit.

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 Firms agree to share market but keep a considerable

degree of freedom concerning the style of their output, their selling activities and other decisions. There are two method:
Non-price competition agreements
Sharing of the market by agreement on quotas

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 It is a form of collusive oligopoly market

One firm sets the price and the other firms follow it.
Price leadership is of three types:

Price leadership by a low cost firm

Price leadership by a large (dominant) firm

Barometric price leadership

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 Developed by economist Oskar Morgenstern and

mathematician John Neumann in 1950s. Outcome of incomes for the players in the game theory is represented by pay-off matrix. The various strategies are:
Dominant Strategy Nash Equilibrium Maxi-min Strategy

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 Pay-off matrix shows strategies of two

players. Firm X
Normal Price Competitive price

Firm Y

Normal Price Competitive price

P(100,100)

Q(-500,-100)

R(-100,-500) S(-300,-300)
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 Dominant strategy is the strategy which is

profitable for one of the players, irrespective of the strategy adopted by the other player.
Firm X
Normal Price Competitive price

Firm Y

Normal Price Competitive price

P(100,100)

Q(-500,-100)

R(-100,-500)

S(-300,-300)
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 When there is no strategy applicable, each of the

firms considers operating at normal prices or increases the prices and tries to earn monopoly profit.
Firm X
Normal Price Competitive price

Firm Y

Normal Price Competitive price

P(100,100) R(400,-250)

Q(-150,400) S(700,300)
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 It the players are risk averse, they will try to max the

min possible benefit form the game. Each player tries to get the maximum profit in the worst possible outcome at whatever strategy adopted by the other competing player.

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 Each player is aware of the strategies available.

All the players in the game are intelligent and rational.

Selection of strategies by players is simultaneous. Players try maximum gain or min loss.

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 The players can only make a guess about the rivals

strategies. It is complex and difficult. Collusion between player to maximize profit is impractical.

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