AP Microeconomics Notes

Chapter 12: Imperfect Competition

  1. Introduction
    1. ​Basic Concepts
      1. ​In the long run:
        1. ​monopolistic competition will be inefficient mainly due to excess capacity
        2. tendency for zero economic profits at average total cost equals profit maximizing level of output
      2. ​Allocative Inefficiency
        1. ​identified by P > MC (price > marginal cost)
        2. tendency to price thing at a higher level than the costs to produce additional units
      3. ​Output level restricted in order to maximize profits
        1. ​optimal at MR = MC
          1. ​results in higher price and less output in the long run
      4. ​​Stronger barriers to entry under oligopoly than under monopolistic competition
      5. Monopolistic competition characterized by:
        1. ​non-price competition
          1. ​advertising
          3. unique products
          4. warranties
          5. coupons
          6. appeal to brand or store names
        2. ​differentiated products
        3. innovation
        4. large number of buyers and sellers
        5. few barriers to entry and exit
      6. ​Under oligopoly, more interdependence of the firms
        1. ​rivals match price decreases but not increases
        2. more true for the noncollusive model
      7. ​Charge higher prices than needed to maximize profits
      8. When merger activity increases, the structure, behavior, and performance of oligopolists comes into play on policy decisions
  2. ​​Monopolistic Competition
    1. ​Summary
      1. ​The most common (but not most dominant) type of market structure in the U.S.
      2. Relatively easy entry
      3. Differentiated products
      4. Advertising, non price competition
      5. Large number of buyers and sellers
      6. Long run equilibrium: zero economic profits
      7. Allocatively inefficient: price > MC
      8. P > MR: price strategy, price-makers
      9. Inefficient, excess capacity
  3. ​​Oligopoly: The Non-Collusive Kinked Demand Model
    1. ​Basics
      1. ​Rivals may base their strategies in part on the anticipated reactions of other firms
      2. The kinked demand curve assumes:
        1. ​there are no collusive activities among the rival oligopolists
        2. there is no price leader
        3. there are relatively equal market shares among the rival oligopolists
    2. ​​Alternative Characteristics of Other Oligopoly Markets
      1. ​Price leadership
        1. ​the dominant firm can set the price to maximize profits
        2. other firms follow since they are virtually unable to gain market share by maintaining price
      2. ​Cooperative noncollusive activities
        1. ​tacit understandings about the value of limited advertising, promotion, etc.
        2. much of this is based on the interdependence of oligopolists
      3. ​Collusive Oligopolies
        1. ​rivals may divide markets among themselves according to regional areas or product specializations
        2. include agreements to charge the same or higher prices
        3. cartels
          1. ​​​price-makers
          2. ​​may have production limits or price agreements among its members in an effort to set or control prices
          3. ex: OPEC (Organization of Petroleum Exporting Countries)
    3. ​​​Nash Equilibrium
      1. ​The strategy of each player is the best choice based on the strategy of the other player
      2. A game theory
      3. John Nash- mathematician
    4. ​Summary: Oligopoly
      1. ​Formidable barriers to entry
      2. Differentiated or similar product
      3. Interdependence
      4. Few firms, controlling major shares of market
      5. Allocatively inefficient
        1. ​P > MC, excess profits
      6. ​Price > marginal revenue indicating pricing strategy and non-price competition
      7. Price-makers
      8. ​​Collusive activities and cooperative arrangements
      9. dominant type of market structure in U.S. industry
      10. Firms more likely to follow a price decrease than increase

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How to cite this note (MLA)

Aboukhadijeh, Feross. "Chapter 12: Imperfect Competition" StudyNotes.org. Study Notes, LLC., 13 Oct. 2013. Web. 15 Jan. 2025. <https://www.apstudynotes.org/microeconomics/outlines/chapter-12-imperfect-competition/>.

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