Decreased Price Competition

In a P-competitive industry, in the long run, economic profits will be zero and prices determined by supply and demand. In a monopoly, prices are higher and the industry profit is at a maximum. How high will the profits and prices of an imperfectly competitive industry be? This issue has been discussed by economists for over a hundred years, and is still not entirely resolved!

Of course, the answer may depend somewhat on the structure of the industry we are looking at -- remember, there is a wide range of imperfectly competitive structures. Here, we do need to distinguish between monopolistic competition and oligopoly.

For monopolistic competition, there is free entry, so (as in P-competition) economic profits will be zero in the long run. As long as there are positive economic profits, new competition will be attracted into the industry group, and therefore positive economic profits will not be stable in a monopolistically competitive industry. However, some economists believe that a monopolistically competitive industry may have high prices because nonprice competition pushes up costs.

For oligopoly, we will have to consider several hypotheses.