Imperfect Competition

Today’s LEQ: Why might competition ensure efficiency?

Most Markets…

Do not fit strict assumptions of perfect competition; usually differ in one or more factors

For example: Products may not be completely

identical Entrance into the market may be

costly/difficult

Characteristics/Consequences of Imperfectly Competitive Market

Firms in imperfectly competitive markets are often interdependent, with the actions of one firm greatly affecting business for its competitors

Characteristics/Consequences of Imperfectly Competitive Market

Large firms competing with other large firms often try to avoid direct price competition Uncertain how competitors would

react Joint interest in keeping prices above

the level that would result in perfect competition

Characteristics/Consequences of Imperfectly Competitive Market

In markets dominated by a few large firms, there are some strong pressures supporting price collusion Tacit vs. Explicit in countries like the

U.S. i.e. cell phone companies, cable/Internet

providers Tacit = understood or implied without

being stated Activity 3: Dueling Gas Stations

Characteristics/Consequences of Imperfectly Competitive Market

Both large and small firms in imperfectly competitive markets emphasize nonprice competition Think of all the advertising that stresses

real or imagined differences in the quality of g/s provided to customers!

Non-Price Competition Taste Testing Activity – Real vs. Imagined Differences

Non-Price Competition:Real vs. Imagined Differences

1. List strategies each company probably uses for non-price competition.

2. What differences is each company trying to emphasize?

Non-Price Competition:Real vs. Imagined Differences

1. Based on the class results of our blind taste test, did the advertisements promote real or imagined differences?

2. Under which market structure would these companies be categorized?

Pros/Cons

Perfect Competition… Usually lower prices Efficient use of scarce resources Less variety s

Imperfect competition Less competition leads to less output and

higher prices BUT, often offset by large firms able to take

care of economies of scale▪ i.e. “mom & pop shop” vs. Walmart

More variety

The BIG Ideas

Evaluating imperfectly competitive markets involves weighing the costs & benefits

Gov’t should work towards eliminating extreme concentrations of market power & collusive behavior to maintain efficient competition

BUT, policies should stop far short of breaking up large firms just because the market isn’t perfectly competitive.

Wheat Game… Again!!!

Recall the equilibrium price established in prior rounds – about $5.00

Let’s try this game again but with only 4 sellers

Wheat Game Recap

What happened to the supply curve for wheat?

What happened to the equilibrium price for wheat?

Activity 4

We’re All in This Together… Aren’t We?!

Homework: Activity 5

The Airlines Case: Is Big Better?

3-2-1 Exit Ticket

3 market structures that demonstrate imperfect competition

2 characteristics of imperfect competition

1 question you have on what we’ve covered so far… Anything on which you’re confused??