Theories of imperfect competition
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Theories of Imperfect Competition. Major Contributors: Piero Sraffa (1898-1983) Joan Robinson (1903-1983) Edward Chamberlin (1899-1967) Sraffa’s 1926 article on the laws of return Criticism of Marshall’s external economies as a way of reconciling falling supply prices with competition

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Theories of Imperfect Competition

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Theories of imperfect competition

Theories of Imperfect Competition

  • Major Contributors:

    • Piero Sraffa (1898-1983)

    • Joan Robinson (1903-1983)

    • Edward Chamberlin (1899-1967)

  • Sraffa’s 1926 article on the laws of return

  • Criticism of Marshall’s external economies as a way of reconciling falling supply prices with competition

  • Need to focus on monopoly


Joan robinson and imperfect competition

Joan Robinson and Imperfect Competition

  • The Economics of Imperfect Competition (1933)

  • Introduction of marginal revenue curves

  • Deals with an individual firm assuming the firm has its own market and faces a downward sloping demand curve

  • In the absence of new entry, the analysis is as for a monopoly


Monopoly equilibrium

Monopoly Equilibrium

  • A monopoly faces the market demand curve

  • For a single price monopoly the D curve is the AR curve

  • MR will lie below AR curve

  • Monopoly profit max equilibrium where MC=MR

  • Second order condition is that the MC cuts the MR from below


Monopoly equilibrium1

Monopoly Equilibrium

MC

P

D=AR

MR

Q

Point a is not an equilibrium

P

MC

a

b

D=AR

MR

Q


Monopoly equilibrium2

Monopoly Equilibrium

  • Firm will have excess profits if P > ATC

  • If no new entry of other firms selling substitute goods excess profit can remain

  • Idea of “full equilibrium” where other firms come in and all firms are where MC =MR and

    P = ATC but each firm still facing a downward sloping demand curve


Price discrimination

Price Discrimination

  • Perfect price discrimination

    • D curve becomes the MR curve

    • No restriction of output

P

MC

Total

revenue

D=MR

Q

Q


Price discrimination1

Price Discrimination

  • Market segmentation

    • Profit max output where the aggregate MR=MC

    • Allocate output between markets so as to equalize MR

$

MC

MR

MR1+MR2

Q

Total Q


Price discrimination2

Price Discrimination

p1

D1

p2

MR

D2

MR1

MR2

q2

q1

Price discrimination of this type may or

may not increase total output as compared

with a single price monopolist depending on

exact shapes of the demand curves. In the

case of linear demand curves total output

will be the same


Imperfect factor markets

Imperfect Factor Markets

  • Effects of monopoly in output market on the factor market

    • Firms will hire where W=MRP

    • But MRP<VMP

    • Monopoly exploitation of labour

Wage

S

w

D comp

D monop

L

l


Imperfect factor markets1

Imperfect Factor Markets

  • Effects of monopsony in the factor market

    • Single buyer in the labour market

    • Faces upward sloping supply curve for the factor

    • Marginal cost of the factor lies above the supply curve

    • Firm equates MRP with MC of the factor

    • Wage below VMP

    • Monopsony exploitation of labour


Monopsony exploitation

Monopsony Exploitation

W

MC of labour

S

mrp

w

D=MRP

L

l

Difference between mrp and w is monopsony

exploitation of labour


Edward chamberlin monopolistic competition

Edward Chamberlin: Monopolistic Competition

  • Theory of Monopolistic Competition 1933

  • Very different starting point from Robinson

  • Not an issue with Marshall’s laws of return, but a response to the existence of advertising and product differentiation

  • Firms have monopoly over their own brands but there are many close substitutes


Monopolistic competition demand

Monopolistic Competition: Demand

  • Firms face two demand curves

  • one showing the demand with the prices of other brands given (dd curve)

  • the other is a share of the market curve which is drawn for this brand assuming all brands have the same price (DD curve)

  • Chamberlin assumes symmetry between firms


Monopolistic competition

Monopolistic Competition

Demand curves facing the firm

P

D

d

p

d

D

q

Q


Monopolistic competition1

Monopolistic Competition

  • Monopolistic competition

  • Large group and small group models

  • Large group: like perfect competition but for product differentiation

  • Small group: oligopoly, barriers to entry: like monopoly but an issue of firms being aware of their interdependence


Monopolistic competition large group

Monopolistic Competition: Large Group

  • Equilibrium for the individual firm is where mr (derived from the dd curve) = MC

  • For this to be consistent with equilibrium for the group the firm must also be on its share of the market demand curve

  • In the long run all firms must just be making normal profits due to free entry condition

  • Long run equilibrium will be to the lest of min LRACT


Large group equilibrium

Large Group Equilibrium

P

Short Run

D

d

MC

p

d

mr

D

q

Q

P

Long run

D

MC

d

LRATC

p

d

mr

D

Q

q


Small group model

Small Group Model

  • Small number of firms

  • Barriers to entry

  • If all firms charge the same price then each firm only faces the DD demand curve

  • Similar to monopoly equilibrium

P

D

p

MC

D

MR

Q

q


Kinked demand curve model

Kinked Demand Curve Model

  • But will all firms charge the same price? What happens if one firm changes price?

  • That firm might believe that other firms will follow price cuts but will not follow price rises

  • Paul Sweezy and the kinked demand curve model (1939)

  • Discontinuity in MR curve

  • Price inflexibility thesis


Kinked demand curve model1

Kinked Demand Curve Model

P

D

d

p

d

D

Q

q

P

MC’

P

MC”

D

MR

Q


General problem of oligopoly analysis

General Problem of Oligopoly Analysis

  • Problem of interdependence

  • Cournot model of duopoly

  • Stackelberg and price leadership models

  • More recent game theory approaches– oligopoly as a prisoners’ dilemma game

  • Cournot-Nash equilibrium

  • One shot and repeated games

  • Evolutionary game theory and evolutionary stable strategies


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