Monopoly, Mopolistic Competition and Oligopoly
Table of Contents
This section covers the following topics:
- The nature of a monopoly
- Deadweight loss and monopoly
- Calculating profit and loss from a graph
- The lazy monopolist and X-inefficiency
- The nature of monopolistic competition
- The nature of an oligopoly
- The contestable market and cartel models
- Stick prices, price wars and predatory pricing
- Game theory
Section Summary
Some companies have a monopoly in an industry, meaning that they have no competition. Monopolies are established and protected by the existence of barriers to entry of some kind. Monopolists can make long-run economic profits.
Compared to a perfectly competitive firm, a monopolist will produce fewer units of a good and charge a higher price. This creates a deadweight loss, which reduces total surplus.
You can calculate a monopolist’s profit or loss from a graph by finding the price of each good it sells, the quantity of goods sold and the average total cost per good.
Because monopolists don’t have any competition, sometimes they become lazy and allow costs to rise. This X-inefficiency is bad for the shareholders of the company.
In a monopolistically competitive market, there are many firms, selling differentiated products, with minimal long-run barriers to entry. Firms in this market cannot make long-run economic profits. However, firms can use advertising to increase demand for their product and earn a higher return on their money.
In an oligopoly, there are a small number of firms that make interdependent decisions and are protected by significant barriers to entry. An oligopoly can either take the form of a contestable market, where firms compete, or a cartel, where firms limit production with quotas and collectively behave like a monopoly.
Prices tend to be “sticky” in an oligopoly, as firms face a kinked demand curve. If they lower price, their competitors will match them and everyone’s worse off, while raising... Sign up to continue reading Monopoly, Mopolistic Competition and Oligopoly >
