Imperfect competition Chapter 15 Imperfect Competition

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 P 1 P 2 D = AR Q 1 Q 2 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 Long • 2008 Q 8 • • 2009 Q 2 2007 Q 2 2005 Q 2 2001 Q 1

Exam Questions (OL) Short Long • 2008 Q 5 p 106 • 2002 Q 4 p 156 • • 2006 Q 1 p 126 2004 Q 1 p 142 2002 Q 1 p 158 1998 Q 1 p 182