ECON1101 - Imperfect Competition

A market is imperfectly competitive if it breaks the hallmarks of perfect competition.
i.e. some sellers have power in the market, and hence the ability to set the price.

Forms of Imperfect Competition

Monopolies and Oligopolies are both forms of imperfect competition where either one firm or one small group of firms controls all of the market power.

Monopolistic Competition describes a market where a large number of firms produce slightly different products that are very close substitutes for each other.

On a spectrum it would go perfect, monopolostic, oligopolies, monopolies.

Barriers to Entry (that can create an imperfect market)

  • Exclusive control over inputs
  • Government-created monopolies
  • Economies of Scale (can create natural monopolies)
  • Network economies
Price Discrimination
Charging different buyers different prices for the same good/service.
Perfect Price Discrimination
Every buyer is charged their reservation price.
Group Pricing
Certain groups are given a discount (e.g. charities or big businesses etc)
Hurdle Pricing/Versioning
All buyers who overcome a certain obstacle (hurdle) are given a discount.

Efficiency of Price Discrimination

"The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers."
- Wikipedia.

Price discrimination was illegal until 1995. The Trade Practices Act allowed the Australian Competition and Consumer Commission police cases of Collusion, false advertising and mergers designed to increase market power.