“Imperfect Competition and Monopoly”

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 10.04.2020>

Dear reader,

Hi! If you are interested in Economics, I’ve prepared the below to help you understand the basics. You should take a look at this short article in which I discuss the market form types of Imperfect Competition and Monopoly.

Except Perfect Competition, another extreme market form is Monopoly. Monopoly compared with other marker forms is the most unwanted form for the consumer. Only one business exists in this market and it provides/produces a unique product, without close substitutes to many buyers. There are no competitors.

> The business is not a price taker but a price maker. The business can choose not only what quantity to produce but also which price to set.

> The same need is not satisfied by consuming other products. (i.e. in example same need is satisfied by using sabtitutes candle light vs electricity light)

> The consumer can buy the good/product only from one business that can set both quantity and price leading for demand to be very inelastic, ED < 1 (in absolute value).

> Advertisement in this market is unnecessary for attracting buyers, is rather informative improving public relations.

Businesses cannot enter the sector. There are barriers to entry, either by physical, legal or economic factors. Excludes the possibility of Competition. If there were no (or only low) barriers, other firms would enter such markets to participate in the monopoly profits.

What generates Monopolies?

1) Exclusivity on resources > ownership of a key input (only one business has access to such resources needed to produce the good/product).

2) Patent > government protection. (sets legal berries or provides patents to inventors/protects copyright infringement).

3) Natural Monopoly > a case where the cost of production is lower when only one business can serve all consumers.

The government does not want monopoly’s to form. They are simply not in favor of the consumer’s pocket since the consumer pays a high price.

If they do they will have to have a license/permission. Those that have are usually non-profit organizations offering pubic services (i.e. in Cyprus we have: Electricity Authority of Cyprus, The Water Board of Limassol (WBL) etc.)

Between Perfect Competition and Monopoly there is Imperfect Competition. Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar/differentiated) goods as opposed to the perfect competitive market.

Examples of imperfect competition include oligopoly, monopolistic competition, monopsony and oligopsony.> Not many businesses exist in this market and each one’s activity can affect the price and the profits of all. Each business has some market power. Monopolistic competitive firms are most common in industries where differentiation is possible, such as: The restaurant business, hotels and pubs. Other examples: businesses providing food, medicine, clothes, shoes, gas stations, insurance, entertainment.

Characteristics:

a) Great number of businesses competing one another.

b) One business alone has not enough market power to affect the market price significantly but only slightly due to the slight differentiation of the product.

c) Differentiation makes the product unique and can be physical or based on illusions of consumers (different depend on consumer’s perception).

d) Relevant entry and exit of businesses from the sector. In the long-term economic profit becomes zero.

An oligopoly is a market form wherein a market or industry is dominated by a small number of large sellers. Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices  for consumers (closer to Monopoly conditions).  i.e. Google, Microsoft, Car Manufacturing businesses, Sony (gaming consoles) etc.

Characteristics:

a) Small number of businesses competing one another.

b) One business alone has enough market power to affect the market price significantly, decisions have to be taken carefully since each decision affects each others profits greatly and has to consider the response and decisions of the other businesses.

c) Possible price wars to occur. The businesses in this form try to avoid this.

d) Homogeneity or Differentiation of the product exists but from only these small number of businesses. Two types of oligopoly can exist because of this. Each business has incentives for advertisement and innovation trying to generate differentiation.

e) Difficult to entry for new businesses in the sector. (i.e. copyright, large advertisement costs etc..)


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

References:
Ιωάννου-Σεργίου Μ., Μάτση Μ., Σάββα Ν., Σταύρου-Παπαδοπούλου Λ., Οικονομικά Α’ Λυκείου, Α΄ Έκδοση 2016. Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Β’ Λυκείου, Κύπρος, Α΄ Έκδοση 2016.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Γ’ Λυκείου, Κύπρος, Α΄ Έκδοση 2017.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Besanko, David Braeutigam, Ronald R. Gibbs, Michael, 2011, Microeconomics, Hoboken: John Wiley, 4th ed,
International student version
Frank, Robert H., 2010, Microeconomics and Behavior, New York: McGraw-Hill Irwin, 8th ed.
Estrin, Saul Laidler, David E. W. Dietrich, Michael ., 2008, Microeconomics, Harlow: FT/ Prentice Hall, 5th ed.

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.

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