Imperfect Competition

Most real markets are imperfectly competitive 不完全竞争: firms have some market power 市场势力 – the ability to set price rather than take it. The source of that power is a downward-sloping demand curve facing the firm, which means that to sell one more unit the firm must lower the price on all units.

Market structures range from perfect competition to monopoly

Because of this, marginal revenue is below price ($MR) for every firm with market power. On a straight-line demand curve the MR curve has the same intercept but twice the slope, lying below demand. This one fact – $MR – separates every imperfect market from perfect competition and explains why they produce less and charge more.

Worked example. A firm with market power faces demand $P=100-Q$. Selling $1$ unit gives $P=\$99$ and total revenue $\$99$; selling a $2$nd forces the price down to $\$98$ on both units, so revenue rises to $2\times98=\$196$. The marginal revenue of that $2$nd unit is $196-99=\$97$ – below its $\$98$ price. In general $MR=100-2Q$, falling twice as fast as demand.

A monopoly 垄断 is a single seller of a product with no close substitutes, protected by barriers to entry 进入壁垒 (economies of scale – a natural monopoly 自然垄断 – control of a key resource, patents, or government license).

A monopoly maximises profit where MC = MR and can earn supernormal profit

• The monopolist maximizes profit at $MR=MC$, then charges the highest price the demand curve allows at that quantity (read price up to the demand curve, not the MR curve).
• Compared with perfect competition it produces less and charges more, earning long-run economic profit because entry is blocked.
• This under-production creates deadweight loss 无谓损失 – the monopoly is allocatively inefficient because $P>MC$: the last unit is worth more than it costs, yet is not made.

Governments may respond with antitrust 反垄断 law, or regulate a natural monopoly's price toward $P=MC$ (socially optimal, but may cause a loss) or $P=ATC$ (fair-return, break-even).

Exam skill: the monopoly graph is a staple – show quantity at $MR=MC$, price up on the demand curve, and shade profit (between $P$ and $ATC$) and deadweight loss (the triangle to the competitive quantity).

Price discrimination 价格歧视 is charging different buyers different prices for the same good. It requires market power, the ability to separate buyers by willingness to pay, and the ability to prevent resale.

Under perfect (first-degree) price discrimination, the firm charges each buyer their maximum price. The result: the firm produces the efficient quantity (where $P=MC$, no deadweight loss), but converts all consumer surplus into producer surplus (profit). Real examples – student discounts, airline fares, coupons – are partial versions.

Monopolistic competition 垄断竞争 has many firms selling differentiated 差异化 products with easy entry and exit (restaurants, salons, clothing brands). Product differentiation gives each firm a downward-sloping demand curve and thus some price-setting power.

• Short run: like a monopoly – produce at $MR=MC$, and profit or loss is possible.
• Long run: easy entry competes away profit, so each firm earns zero economic profit, producing where demand is tangent to ATC.
• Because it still charges $P>MC$ and does not produce at minimum ATC, it has excess capacity 过剩产能 and is neither allocatively nor productively efficient. The trade-off society accepts is product variety and choice.

An oligopoly 寡头垄断 is a market with a few large, interdependent 相互依存 firms (cars, airlines, phones). Because each firm's best move depends on rivals' moves, we analyze them with game theory 博弈论.

• A payoff matrix 收益矩阵 shows each firm's profit for every combination of choices.
• A dominant strategy 优势策略 is a firm's best choice regardless of what the rival does.
• A Nash equilibrium 纳什均衡 is an outcome where no firm can do better by unilaterally changing its choice.
• The classic prisoners' dilemma 囚徒困境 shows why firms often fail to cooperate: both would gain by colluding 勾结 (acting like a monopoly), but each has an incentive to cheat, so they end up at the competitive-ish, lower-profit outcome. Collusion and cartels 卡特尔 are unstable for the same reason (and usually illegal).

Worked example. Two firms each choose a High or Low price. Profits (A, B): both High $\to(10,10)$; A Low, B High $\to(14,4)$; A High, B Low $\to(4,14)$; both Low $\to(6,6)$. For A: if B plays High, Low ($14$) beats High ($10$); if B plays Low, Low ($6$) beats High ($4$) – so Low is A's dominant strategy, and by symmetry B's too. The Nash equilibrium is both Low $(6,6)$, worse for both than the cooperative $(10,10)$ – the prisoners' dilemma in action.

A prisoners' dilemma: each firm's dominant strategy is Low, giving the Nash equilibrium

Exam skill: be able to find each firm's dominant strategy and the Nash equilibrium from a 2×2 payoff matrix, and explain why the cooperative outcome is hard to sustain.

• A firm with market power faces a downward-sloping demand, so MR < P (MR has twice the slope).
• A monopoly produces where MR = MC, then charges the price up on the demand curve; it makes deadweight loss because $P > MC$.
• Under perfect price discrimination the firm produces the efficient quantity but captures all consumer surplus.
• Monopolistic competition earns zero long-run profit with excess capacity (product variety is the trade-off).
• In an oligopoly find the dominant strategy and Nash equilibrium from the payoff matrix; the cooperative outcome is hard to sustain.