ACC 818 — Module 6: Imperfect Competition
Most real markets sit between perfect competition and monopoly. This module covers the two main intermediate forms: monopolistic competition and oligopoly, plus an introduction to game theory for analyzing strategic interactions.
Learning Outcomes
- Detail the key elements of monopolistic competition
- Discuss the rudiments of cartels
- Explain the concept of “oligopoly”
- Compare and contrast perfect competition, monopolistic competition, oligopoly, and monopoly
The Spectrum of Market Structures
| Structure | # Firms | Product | Entry | Power |
|---|---|---|---|---|
| Perfect competition | Many | Identical | Free | None |
| Monopolistic competition | Many | Differentiated | Free | Slight |
| Oligopoly | Few | Identical or differentiated | Restricted | Significant |
| Monopoly | One | Unique | Blocked | Total |
Topic 1: Oligopolies
- Few large firms dominate the market (Boeing/Airbus; Coca-Cola/Pepsi).
- High barriers to entry.
- Mutual interdependence — each firm’s strategic decisions (price, output, advertising) depend on what rivals do.
- Two extremes:
- Compete → behave like perfect competitors → zero profits
- Collude (cartel) → behave like a monopoly → high prices, high profits
- Real-world oligopolies oscillate between these.
Topic 2: Monopolistic Competition
- Many firms, but each sells a differentiated product (clothing styles, restaurants, beer brands).
- Each firm has a “mini-monopoly” on its specific version.
- Differentiation can come from:
- Physical attributes (non-stick, freezer-to-microwave)
- Location (gas station at a busy intersection)
- Intangibles (warranty, reputation, free delivery)
- Perception, especially via advertising
- Free entry erodes long-run profits to zero, even though each firm has some pricing power.
Topic 3: Game Theory
Tool for analyzing strategic decisions where outcomes depend on others’ choices.
- Strategic decision — pricing, marketing, product launches.
- Payoff — change in economic profit resulting from the combined choices of all players.
- Prisoner’s Dilemma — classic illustration of why cooperation breaks down even when both parties would gain from it.
- Nash Equilibrium — a state where no player can improve their payoff by unilaterally changing strategy.
Worked illustration: in 2005, some airlines raised fares expecting higher profits. When others didn’t follow, they had to reverse course — and several went bankrupt. The strategic choice depended entirely on rivals’ reactions.
Key Terms
Oligopoly · Monopolistic Competition · Cartel · Mutual Interdependence · Product Differentiation · Game Theory · Nash Equilibrium · Prisoner’s Dilemma · Strategic Decision · Payoff