Chapter Summary

This chapter has undertaken to survey the industries that don't seem to fit into either the "P-competitive" or "monopoly" category: oligopolies and monopolistically competitive industries, or, taking both together, imperfectly competitive industries. These industries deviate from one or another of the four characteristics of P-competition, but also involve some competition among two or more firms selling close substitutes, if not the same products.

The two major implications of imperfect competition, by comparison with P-competition, are

increased nonprice competition: Unlike price competition, nonprice competition may be costly and may or may not make consumers better off all in all. Nonprice competition is a mixed bag, but most economists are persuaded that, on the whole, more competition among sellers is better than less.
decreased price competition: Price competition favors customers and promotes efficiency, so decreased price competition is clearly a bad aspect of imperfect competition. But how much will price competition be reduced? Turning to game theory, we learn that there is no one "rational" answer to the choice of price strategies in oligopoly, so the question cannot be given a precise answer. But there is some evidence that the intensity of price competition increases as the number of firms gets larger and their size gets smaller, relative to the industry.

These problems mean that the decisions of imperfectly competitive firms are strategic in a sense that monopoly decisions and the decisions of P-competitive firms are not. Accordingly, we have followed modern economics (and mathematics and other social sciences) in digressing a bit on an important modern theory of strategic choices called "game theory." Here, too, we find not clear answers but a range of possibilities: the "solutions" to or equilibria in "games" may be cooperative or noncooperative. The noncooperative games sometimes lead to results that nobody wants -- such as low prices and zero economic profits in an oligopoly -- but we also have to consider the possibility of a cooperative solution with monopoly prices and profits.

Imperfect competition remains a controversial area in economics. Some economists would argue that imperfect competition is the rule, rather than the exception, and they conclude that the "Fundamental Principle of Microeconomics" -- however fundamental for theory -- has little application in the real world. Other economists would argue that, even if imperfect competition is pretty wide-spread, the deviations from supply-demand pricing in the real world are small, minor and temporary, so that "supply and demand" remains our best guide to prices and outputs in our market economy, with a very few obvious exceptions. This latter view has become more widespread and influential over the past 30 years, and that change has contributed to the political climate that led to deregulation in the years since 1977.

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