Imperfect competition
Chapter 15
Imperfect Competition
• Neither PC nor monopoly offer
consumers any choice.
• Perfect competition is idealistic.
• In PC goods are homogeneous but in
reality competitors set out to
distinguish their products.
• There are substitute goods available
for most goods.
• These goods are produced under
conditions known as imperfect
competition.
• Eg. Retail market for petrol in
Ireland
• Even though goods are close
subtitutes they are still unique.
• This is why imperfect competition is
sometimes referred to as
monopolistic competition.
Demand curve of a firm in
imperfect competition
• Is downward sloping from left to
right.
• Because there are many close
substitutes.
• If a firm increases price consumers
will switch to cheaper competitors.
• Therefore inc price = less deamand.
Price
P1
P2
D = AR
Q1
Q2
Quantity
Assumptions for IC
1. There are many buyers in
the industry
• An individual buyer, by his/her own
actions cannot influence the market
price of the goods.
• If one person decides not to buy the
good it will make no difference to the
price of the good.
2. There are many sellers
in the industry.
• An individual seller can influence the
quantity sold by the price it charges
for it’s output.
• Products are unique but close
substitutes.
• Increasing price, reduces amount
sold.
• Decreasing price increases amount
sold.
3. Freedom of entry and exit
• It is possible for firms to enter and
leave the industry as they wish.
• Firms already in the industry cannot
prevent new firms form entering.
• There are no barriers to entry or
exit within the industry.
4. Profits
• Each firm is aware of the profits
being earned by other firms.
• Each firm tries to maximise profits.
• This happens where MC = MR
5. Competition for the factors
of production
• There is not a perfect elasticity of
supply for the factors of production.
• If more firms enter the industry
they will compete for the FOP.
• This will drive up costs.
6. Product differentiation
• Unique goods
• Firms persuade consumers to buy
their goods by making them slightly
different.
• Branding
• Establishing different and distinctive
brand names creates customer
loyalty.
• Eg Nike, Addidas, Reebok…
• Competitive advertising
• Creates differnces in the minds of
consumers.
• Attemps to convince customers that
Brand X is better than Brand Y.
• Packaging makes product recognisable.
Eg. Daz V Surf….
• Product innovation
• Firms develop there product so it is
better or more advanced than
competitors.
2005 Q 2 (c) (ii)
• Effect of product differentiation on
the AR and MR curves
• AR downward sloping form left to
right.
• As products are close substitutes.
• If a firm lowers prices it can expect
to attract some new customers.
• If a firm increases prices it may lose
some customres.
• If AR is falling then MR is also falling
and lies below AR (maths).
• To encourage more customers the
firm must drop prices.
• The AR curve is falling.
• The revenue form the increased sales
will be reduced by the falling revenue
on each unit previously sold at the
higher price but now at a reduced
price.
Advantages of IC
• See book page
Disadvantages of IC
• See book page
Imperfect Competition is
wasteful because
• It does not produce at the lowest
point on the AC curve.
• It engages in competitive advertising.
• Large no. of small firms cannot
benefit from economies of scale.
• Cost of the FOP increase as the no.
of suppliers increase.
Types of Advertising
1.
•
•
•
•
Informative
Is factual.
It supplies information.
Used by the government.
Eg. Drink driving
2. Persuasive
• Used to sell non essential/luxury
items.
• No reference to competitors.
• Eg. Hair products.
• Because your worth it!
3. Competitive Advertising
• Used when there is a large number of
similar products on the market.
• Eg. Fairy last twice as long as
the next leading brand!
4. Generic Advertising
• Promotes the product rather than
the brand.
• Eg. Drink milk it is good for you!
Exam Questions (HL)
Short
• 2008 Q 8
Long
• 2009 Q 2
• 2007 Q 2
• 2005 Q 2
• 2001 Q 1
Exam Questions (OL)
Short
• 2008 Q 5 p106
• 2002 Q 4 p156
Long
• 2006 Q 1 p 126
• 2004 Q 1 p142
• 2002 Q 1 p 158
• 1998 Q 1 p 182