Introduction to Microeconomics Chapter 10: Imperfect Competition
Chapter 10 shows why competition on monopoly markets, oligopoly markets and markets with monopolistic competition is imperfect.
The main problem with monopoly markets is the fact that monopolies cannot set prices at the point where marginal cost equals marginal revenue, because for them marginal revenue is always smaller than average revenue. Instead, they have to use the demand curve, which depicts average revenue, for setting the price. As a result, monopoly prices are higher than prices on markets with perfect competition, which means a loss of welfare for consumers.
Firms on oligopoly markets may co-operate and act as one, in which case the market outcomes are identical to monopoly markets. The second situation on oligopoly markets is competition, in which case individual oligopolists try to achieve more profit by breaking the production agreement and producing more and thus achieving higher revenues than their competitors. A Nash equilibrium arises if all parties break the agreement and produce more. In this case, all parties concerned suffer losses of revenue as compared with the initial situation of oligopolists behaving as a monopoly.
What differentiates markets with monopolistic competition from markets with perfect competition is the fact that they try to create the impression that their products are unique. This strategy, if successful, allows them to behave like monopolies and charge monopoly prices.
Prof. Dr. Hiltgunt Fanning (Fachhochschule Stralsund)