Perfect and imperfect competition

The condition of the perfectly competitive market:

• homogeneity: all firms sell an identical product for a given market

• atomicity: Both buyers and sellers are so many that they cannot influence the market price: they are price takers 

• free entry and exit on the market: no barriers (natural or artificial) to new firms entering the market or firms to exit the market

• perfect information

• perfect mobility of inputs: no transaction costs

Additional exercise: A monopolist has the cost function TC(q) = 200q + 15q2 and faces the demand function given by p = 1200 -10q.  Find the market price and quantity.

Solution here

• Cournot competition with 2 firms: more details here 

• PS4, Ex 4, last questions:

  • To find the maximum amount Bob is willing to pay for the license, we need to know what would be his profit if he was alone. If Bob was a monopolist, he would earn a profit of 450. Compared with the situation where he's sharing the market with Mark (profit=200), this is 250 more. So his max willingness to pay for the license is 450-200=250

  • If Steve buys the licence, Mark retire but the market structure does not change: it is still a duopoly where each firm has a profit of 200. So the max Steve is willing to pay for the license is 200 at most.