IB Economics 2.11.3 Imperfect Competition Notes

Imperfect Competition: Firms with Some Power over Price

1. Perfect competition sits at one extreme, with no market power at all.
2. Every other structure is a form of imperfect competition, where firms have some power over price.
3. There are three of them.
4. Monopoly is the most powerful and has its own section, 2.11.2.
5. This article covers the other two, monopolistic competition and oligopoly.

Monopolistic Competition: Many Firms, Differentiated Products

1. Monopolistic competition has a large number of small firms with easy entry and exit.
2. Each sells a slightly differentiated product that is still a close substitute for its rivals', like clothing labels, cafes, or hairdressers.
3. The differentiation gives each firm a little power to set its price, so its demand curve slopes gently downward.
4. But because entry is free, any abnormal profit pulls new firms in.
5. So profit is competed away to normal profit in the long run, just as in perfect competition.

Oligopoly: A Few Interdependent Giants

1. Oligopoly is dominated by a few large firms behind high barriers to entry, like car makers, airlines, and mobile networks.
2. Their products may be similar or differentiated.
3. But the defining feature is interdependence: each firm is large enough to move the market.
4. So it constantly watches and reacts to what its rivals do.
5. That gives an oligopolist real and lasting market power.

Where They Sit: Between Perfect Competition and Monopoly

1. Both monopolistic competition and oligopoly face a downward-sloping demand curve.
2. So, unlike a price taker, their marginal revenue lies below price.
3. That lets them hold price above marginal cost.
4. This places them between perfect competition and monopoly.
5. Monopolistic competition sits nearer the competitive end, and oligopoly nearer monopoly.