1. Monopoly
A Monopoly exists when a single firm is the sole producer of a product with no close substitutes. They are "Price Makers," meaning they can set the price by adjusting the quantity supplied.
- One Seller: The Firm IS the Industry.
- High Barriers to Entry: Impossible for others to enter (due to patents, resource ownership, or high fixed costs).
- Unique Product: No substitutes.
The "Mr. DARP" Split
Unlike Perfect Competition, a Monopoly must lower the price to sell more units. This causes the Marginal Revenue (MR) curve to fall faster than the Demand curve.
Price Discrimination
This occurs when a firm charges different prices to different consumers for the same good (e.g., Airline tickets, Student discounts). If a monopoly can Perfectly Price Discriminate:
- They charge everyone exactly their maximum willingness to pay.
- MR merges with Demand (MR = D).
- Consumer Surplus = 0 (The firm takes it all).
- Deadweight Loss = 0 (Allocatively efficient).
2. Monopolistic Competition
This is the "Hybrid" structure. It looks like Perfect Competition (many sellers) but acts like a Monopoly (differentiated products).
| Feature | Explanation |
|---|---|
| Product Differentiation | Goods are not identical (e.g., Burgers, Sneakers). Firms advertise to create brand loyalty. |
| Low Barriers | Easy to enter/exit. This means Zero Economic Profit in the Long Run. |
| Excess Capacity | Firms produce less than the efficient scale (min ATC). They hold back production to keep prices higher. |
If firms are making profit, new firms enter. This introduces more substitutes. The Demand curve for existing firms shifts LEFT until it is tangent to the ATC curve. Profit disappears.
3. Oligopoly & Game Theory
An Oligopoly is a market dominated by a Few Large Firms (e.g., Cell Phone carriers, Car manufacturers). The defining characteristic is Interdependence: what one firm does affects the others.
Game Theory
Because firms are interdependent, they behave strategically. We analyze this using a Payoff Matrix.
High Price
Low Price
Red = Firm A Payoff | Blue = Firm B Payoff
- Dominant Strategy: A choice that is best for a player regardless of what the opponent does. (In the box above, "Low Price" is dominant for both).
- Nash Equilibrium: A situation where neither player has an incentive to switch strategies given the other player's choice. (Bottom Right).
- Cartel/Collusion: If they worked together, they would both choose "High Price" ($100 each). But individual incentives to cheat drive them to "Low Price."
End of Unit 4 Study Guide.