The following article will guide you about how are prices determined under imperfect competition.
Price Determination under Oligopoly:
In an oligopoly situation there are only a few firms and the size of each firm is so large that a single firm can influence considerably the market supply and price. However, an oligopolist cannot determine the output and price independently.
He is required to study the reactions of the rival sellers whenever price is changed. He does not find a stable and definite demand curve for his product as he does not know with certainty to what extent his sales will change in case of any change in the price of his product.
This is so because his actions create various reactions from his rival sellers. If fact, the complete uncertainty unpredictability and inter-dependence prevail in such a market. In actual practice the price is, however, determined through agreements among the oligopolists. In some cases, a particular firm especially the biggest one act as the price-leader and the other firms follow its actions.
The leader fixes the price and the other firms follow it. So, the price under oligopoly is fixed through agreements or collusion among the firms.
Price Determination under Monopolistic Competition:
Under monopolistic competition a firm can to some extent control supply and price by its own independent action. As it has a near-monopoly position in its own product which is different from those of other firms, it can find a certain and stable demand curve for its products, and this demand curve has a slightly downward slope.
A monopolistic competitor produces an output up to that amount at which the marginal cost becomes equal to marginal revenue, because at that output its total profit is the maximum. The price in such a market becomes greater than marginal cost. In the short run a monopolistic competitor may earn excess profits when the price becomes higher than average cost.
This is possible due to the absence of the possibility of new firms entering the industry. But in the long run due to the possibility of new firms entering the industry the price under monopolistic competition becomes equal to long-run average cost giving only normal profits. So, no firm under monopolistic competition can make excess profit or loss in the long run. Such firm is able to make only normal profit which is induced in its total cost.
Price determination under imperfect competition is a complicated task because of the difficulties in getting a certain and stable demand curve of the firm. But one thing is, however, certain that under imperfect competition, the price will be above the marginal cost but how much higher will depend upon the market situation and on elasticity of demand.