Imperfectly
Competitive Markets

Explore market structures where firms have some control over price: monopolistic competition, oligopoly, and monopoly.

AP Microeconomics

What Is Imperfect Competition?

In a perfectly competitive market, many firms sell identical products and no single firm can influence the market price. Imperfect competition describes every other market structure: firms have at least some degree of market power, meaning they can influence the price of their product.

The Spectrum of Market Structures

Why Does It Matter?

Real-World Relevance

Most actual markets are imperfectly competitive: restaurants, tech companies, airlines, and more.

Pricing Power

Firms set prices above $ MC $, leading to different outcomes for consumers and producers.

Efficiency Losses

Imperfect competition typically produces deadweight loss and allocative inefficiency.

The Core Rule: Downward-Sloping Demand

In perfect competition, each firm faces a horizontal demand curve at the market price. In imperfect competition, the firm's demand curve slopes downward. This has a critical implication:

Why $ MR < P $ for Price Setters

1

Output effect: Selling one more unit adds revenue equal to the price of that unit.

2

Price effect: To sell that extra unit, the firm must lower the price on all previous units, which reduces revenue.

3

Net result: $ MR = P + Q \times \frac{\Delta P}{\Delta Q} $. Since $ \frac{\Delta P}{\Delta Q} < 0 $, $ MR < P $.

Three Types of Imperfect Competition

Monopolistic Competition

Many firms sell differentiated products. Free entry and exit. Examples: restaurants, clothing brands.

Oligopoly

Few large firms dominate. Products may be identical or differentiated. Firms are interdependent. Examples: airlines, telecom.

Monopoly

One firm is the entire market. High barriers to entry. Unique product with no close substitutes. Examples: utilities, patents.

Perfect vs. Imperfect Competition

Feature	Perfect Competition	Imperfect Competition
Number of firms	Very many	One to many
Product type	Identical (homogeneous)	Differentiated or unique
Demand curve	Horizontal ($ D = MR = P $)	Downward-sloping ($ MR < P $)
Price setter?	No (price taker)	Yes (price setter)
Long-run economic profit	$ \pi = 0 $	Possible (depends on barriers)
Allocative efficiency	$ P = MC $ ✓	$ P > MC $ ✕

Profit Maximization: $ MR = MC $

Regardless of market structure, every firm maximizes profit by producing where $ MR = MC $. The difference in imperfect competition is how the firm then sets its price.

Barriers to Entry and Long-Run Profits

Barriers to entry are obstacles that prevent new firms from entering a market. They determine whether economic profits persist in the long run.

Low Barriers

Monopolistic competition: new firms enter when profits exist, driving long-run profit to zero.

Moderate Barriers

Oligopoly: economies of scale, brand loyalty, and high start-up costs limit entry. Positive profits may persist.

High Barriers

Monopoly: legal barriers (patents), natural monopoly, or resource control. Long-run profits are sustained.

Deadweight Loss and Inefficiency

How to Analyze Any Imperfect Market

1

Identify the market structure: How many firms? Differentiated or identical product? Barriers to entry?

2

Draw the demand curve: It slopes downward for all imperfectly competitive firms. Place $ MR $ below $ D $.

3

Find profit-maximizing output: Set $ MR = MC $ and solve for $ Q^* $.

4

Read price from demand: Go up to $ D $ at $ Q^* $ to find $ P^* $. Do not read price from $ MR $.

5

Determine profit or loss: Compare $ P^* $ with $ ATC $ at $ Q^* $. Profit per unit = $ P^* - ATC $.

Example 1: Monopoly Pricing

A monopolist faces inverse demand $ P = 100 - 2Q $ and has constant marginal cost $ MC = 20 $. Find the profit-maximizing price and quantity.

1

Total revenue: $ TR = P \times Q = (100 - 2Q)Q = 100Q - 2Q^2 $

2

Marginal revenue: $ MR = \frac{dTR}{dQ} = 100 - 4Q $

3

Set $ MR = MC $: $ 100 - 4Q = 20 $ → $ Q^* = 20 $

4

Price from demand: $ P^* = 100 - 2(20) = \$60 $

Example 2: Calculating Economic Profit

Continuing the monopolist example: if $ ATC = 30 $ at $ Q^* = 20 $, what is the economic profit?

1

Profit per unit: $ P^* - ATC = 60 - 30 = \$30 $

2

Total economic profit: $ \pi = (P^* - ATC) \times Q^* = 30 \times 20 = \$600 $

Example 3: Long-Run Monopolistic Competition

In monopolistic competition, short-run profits attract new firms. Entry shifts each firm's demand curve left until economic profit equals zero:

Common Mistakes to Avoid

✕ Reading Price from MR

The profit-maximizing price comes from the demand curve, not the MR curve. $ MR = MC $ gives you $ Q^* $, then go up to $ D $.

✕ Confusing MR and D

In imperfect competition, $ MR < P $. The MR curve lies below demand. Only in perfect competition does $ MR = P $.

✕ Ignoring Barriers to Entry

Whether profits persist in the long run depends on barriers. Monopolistic competition has free entry, so long-run $ \pi = 0 $. Monopoly does not.

Summary: Market Structures Compared

Feature	Monopolistic Comp.	Oligopoly	Monopoly
Firms	Many	Few	One
Product	Differentiated	Identical or differentiated	Unique
Entry barriers	Low	High	Very high
Price setting	Some power	Significant (interdependent)	Maximum power
Long-run $ \pi $	Zero	Possible > 0	Possible > 0
Efficiency	$ P > MC $, excess capacity	$ P > MC $, DWL	$ P > MC $, largest DWL

Question 1 of 5

In an imperfectly competitive market, a firm's marginal revenue curve lies below its demand curve because:

When a firm faces a downward-sloping demand curve, selling one more unit requires a price reduction on all units, not just the marginal unit. This price effect means $ MR < P $.

Question 2 of 5

A monopolist faces demand $ P = 80 - Q $ and has $ MC = 20 $. What is the profit-maximizing quantity?

With $ P = 80 - Q $, total revenue is $ TR = 80Q - Q^2 $, so $ MR = 80 - 2Q $. Setting $ MR = MC $: $ 80 - 2Q = 20 $ → $ Q^* = 30 $.

Question 3 of 5

In the long run, a monopolistically competitive firm earns zero economic profit because:

With low barriers to entry, new firms enter when existing firms earn positive economic profit. This shifts each firm's demand curve leftward until it is tangent to the ATC curve, so $ P = ATC $ and $ \pi = 0 $.

Question 4 of 5

Which market structure is most likely to sustain long-run economic profits?

A monopoly has the highest barriers to entry (patents, resource control, legal barriers), preventing new firms from entering and competing away economic profits. Both perfect and monopolistic competition see profits driven to zero in the long run.

Question 5 of 5

Deadweight loss arises in imperfectly competitive markets because:

In imperfect competition, the firm maximizes profit at $ MR = MC $, but because $ MR < P $, the resulting price is above marginal cost. This means fewer units are produced than the socially efficient quantity, creating deadweight loss.

Imperfectly
Competitive Markets

What Is Imperfect Competition?

The Spectrum of Market Structures

Why Does It Matter?

The Core Rule: Downward-Sloping Demand

Why \( MR < P \) for Price Setters

Three Types of Imperfect Competition

Perfect vs. Imperfect Competition

Profit Maximization: \( MR = MC \)

Barriers to Entry and Long-Run Profits

Deadweight Loss and Inefficiency

How to Analyze Any Imperfect Market

Example 1: Monopoly Pricing

Example 2: Calculating Economic Profit

Example 3: Long-Run Monopolistic Competition

Common Mistakes to Avoid

Summary: Market Structures Compared

Question 1 of 5

Question 2 of 5

Question 3 of 5

Question 4 of 5

Question 5 of 5

ImperfectlyCompetitive Markets

What Is Imperfect Competition?

The Spectrum of Market Structures

Why Does It Matter?

The Core Rule: Downward-Sloping Demand

Why \( MR < P \) for Price Setters

Three Types of Imperfect Competition

Perfect vs. Imperfect Competition

Profit Maximization: \( MR = MC \)

Barriers to Entry and Long-Run Profits

Deadweight Loss and Inefficiency

How to Analyze Any Imperfect Market

Example 1: Monopoly Pricing

Example 2: Calculating Economic Profit

Example 3: Long-Run Monopolistic Competition

Common Mistakes to Avoid

Summary: Market Structures Compared

Question 1 of 5

Question 2 of 5

Question 3 of 5

Question 4 of 5

Question 5 of 5

Imperfectly
Competitive Markets