Answer to Question #56883 in Microeconomics for Ike

Question

Compare the price and output decisions of a profit-maximizing firm under conditions of pure competition, imperfect competition, and small oligopoly. Show that your answer does not depend upon the cost structure of the firm. What are the social implications?

Answer 1

The price and output decisions of a profit-maximizing firm under conditions of pure competition, imperfect competition, and small oligopoly will be different. In pure competitive market the producer has no market power and is a price-taker, so the equilibrium price is the lowest among the market structures and equilibrium output is the highest, and both price and quantity are socially optimal.
In imperfect or monopolistic competition the firms has some market power and can set the price higher and output lower, than in pure competitive market using differentiated products. The dead weight loss is created, as the price and output decisions are not optimal.
In oligopolistic market the price is also above the competitive equilibrium competitive price and output is lower, but the price and output decision also depends on the ability of creating the collusion between oligopolists. The dead weight loss is still created, as the price and output decisions are not optimal.
Such situation does not depend upon the cost structure of the firm.