SAYRE | MORRIS Seventh Edition Imperfect Competition CHAPTER © 2012 McGraw-Hill Ryerson Limited

Imperfect Competition A market structure in which producers are identifiable and have some control over price Two forms: 1.Monopolistic Competition 2.Oligopoly 11-2© 2012 McGraw-Hill Ryerson Limited 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 11-3© 2012 McGraw-Hill Ryerson Limited 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 11-4© 2012 McGraw-Hill Ryerson Limited LO1

Advertising Criticisms of Advertising Mostly not informative and wasteful Encourages concentration within industries Raises prices to the detriment of consumers 11-5© 2012 McGraw-Hill Ryerson Limited LO1

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 11-6© 2012 McGraw-Hill Ryerson Limited 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 11-7© 2012 McGraw-Hill Ryerson Limited LO2

4 Firm Concentration Ratios 11-8© 2012 McGraw-Hill Ryerson Limited LO2

Monopolistic Competition Characteristics Many small firms acting independently Freedom of entry Products are differentiated Each firm has some control over price 11-9© 2012 McGraw-Hill Ryerson Limited 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 11-10© 2012 McGraw-Hill Ryerson Limited LO3

Monopolistically Competitive Equilibrium (SR) 11-11© 2012 McGraw-Hill Ryerson Limited LO2

Monopolistically Competitive Equilibrium 11-12© 2012 McGraw-Hill Ryerson Limited LO2

11-13© 2012 McGraw-Hill Ryerson Limited LO2

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 11-14© 2012 McGraw-Hill Ryerson Limited LO3