Do you expect a firm's demand curve under imperfect competitionto be flatter or steeper than the market demand curve?

Answer 1

Imperfect competition means either having differentiated products and/or significant barriers to entry. The extent of the differentiation and the level of significance of the barriers will determine what kind of general market structure the market will take. Barriers to entry will determine both number of firms in the market and whether it will be easy for new firms to enter. Generally higher barriers to entry entail fewer firms and difficult entry to the market. Though other factors like market size and symmetric information does play a part in determining market structure, lets assume all else constant(ceterus paribus)

If the products are homogeneous, there may exist a cournot equilibrium in quantity supplied where the firms guess each other's intended output, and hedge their output on their rival's most probable output. Such a condition would mean that the firm just sets output based on intelligent guesses, but takes whatever price is set by market forces.(they cannot set prices because products are NOT differentiated) .

The larger the number of firms, the lower the market share . The larger number of firms means that they face a residual demand based on the number of firms . The elasticity faced by each firm would be n-times the market elasticity, where n is the number of firms. Thus, given homogeneous products the firm's demand curve will be more elastic(based on the number of firms) than the market elasticity(which is also based on n, higher number of firms, closer elasticity is to zero). Competition is deemed inperfect, however, if number of firms is not sufficiently large. This could be due to high barriers to entry(airlines) or other factors.

For differentiated products but relatively low barriers to entry, there is the monopolistic competitive market(NOT to be confused with monopoly, which will be touched upon later). In this market, each firm only supplies a small proportion of the total market's total quantity supplied(a change in quantity by the firm will not affect market price). In this case, each firm will generally have a residual demand curve- meaning it will supply whatever the other firms won't or can't, at a particular price. In such an industry, when a firm is faced with a residual demand,the firm's demand curve will be very much more elastic(flatter) than the market's demand curve. Similar to homogeneous products, just that each firm has some market power to set its own price for its goods but not enough to influence market price.

For Markets with only a few or several large firms each with significant market share and differentiated products(oligopoly), the fact that the demand curve is kinked means that there is no way to tell whether the demand curve facing the firm will be steeper than the market demand curve as the firm's demand curve has two distinct sections with two different elasticities(slopes).

For markets where there is only ONE producer(monopoly) the market demand curve is the firm's demand curve. Thus it will have the same elasticity as the market's demand curve.

Thus the firm's demand curve is expected to be flatter(more elastic) or as flat(elastic) as the market's demand curve, except in the case of an oligopoly where the firm's demand curve has more than one slope.

Regards

6eXo9

Singapore

p.s. feel free to correct me if I'm wrong anywhere, or somewhere.. :)