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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
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