General Notes for Imperfect Competition

Monopoly

MONOPOLY: a competitive structure where there is only 1 seller of a particular product with no close substitutes

• Monopolists are price-searchers.
• The demand curve is downward sloping, so they must lower price to sell additional units.

1. In order to maximize profits, monopolists end up producing less output and charging a higher price than a competitive market would.
2. By charging more and producing less, monopolists takes away consumer and producer surplus - this is called dead weight loss.
3. Monopolists aren't efficient! They fail to achieve productive efficiency by not producing at minimum ATC, and allocative efficiency by not charging a price equal to MC.

Monopolistic Competition

NOTE: In monopolistic competition, the demand curve (AR) is more elastic due to the presence of substitutes!

In the long run, economic profits cause new firms to enter the market. This causes...

• The demand curve of existing profits to shift left (aka the substitute effect)
• Zero Economic Profit occurs (when ATC = AR at the quantity being produced)

Oligopoly: Game Theory

-Game Theory analyzes the behavior of oligopolies

• GAME THEORY: firms take actions based on what they anticipate their rival will do
• uses a Payoff Matrix to analyze/predict the actions of players

• essentially, it's the one box of the Payoff Matrix that should happen