Monopolistic Competition and Oligopoly These slides supplement the

Monopolistic Competition and Oligopoly These slides supplement the textbook, but should not replace reading the textbook

2 A market structure between pure competition and monopoly What is imperfect competition?

3 What is monopolistic competition? A market structure in which a large number of firms sell close substitutes which are different enough that each firm’s demand curve slopes downward

4 How can firms differentiate under monopolistic competition? Physical differences Location Services Product image

5 Restaurants Clothing stores Grocery stores Jewelry stores What are examples of monopolistic competition?

6 Where are profits maximized or minimized ? MR = MC

7 Dollars per unit p Quantity per period The Firm Monopolistic Competition in the Short Run MC 0 Exhibit 1 (a) MR ATC c Profit q D = AR b c e

8 Dollars per unit p Quantity per period The Firm Monopolistic Competition in the Short Run MC 0 Exhibit 1 (b) MR q ATC Loss D=AR AVC c c b

9 Yes! Positive or negative economic profit can be made in the short run In monopolistic competition, can economic profit be made in the short run?

10 What is long-run profit in monopolistic competition? Zero

11 Why is economic profit zero over the long-run? Because if economic profits are being made more firms will enter into the industry; if losses are being made more firms will leave the industry

12 Dollars per unit p Quantity per period Long Run Equilibrium in Monopolistic Competition MC 0 Exhibit 2 MR ATC q D = AR b a

13 How does monopolistic competition compare with perfect competition? They both make a normal profit over the long-run

14 Dollars per unit p Quantity per period Perfect Competition MC 0 Exhibit 3 (a) ATC q d = AR

15 Dollars per unit p' Quantity per period Long Run Equilibrium in Monopolistic Competition MC 0 Exhibit 2 (b) MR ATC q' D = AR

16 What is an oligopoly? A market structure characterized by a small number of firms whose behavior is interdependent

17 Automobiles Steel Soup Cereals What are examples of oligopoly?

18 What is a possible explanation for the formation of oligopolies? Barriers to entry, such as economies of scale or a high cost of entry

19 Dollars per unit ca Autos per year Economies of Scale as Barriers to Entry 0 Exhibit 4 S a cb b Long-run average cost M

20 What is a collusion? An agreement among firms to divide the market or to fix the market price to maximize economic profit

21 Cooperation involving direct communication between competing firms about setting prices What is explicit collusion?

22 Cooperation involving indirect communication between competing firms about setting prices What is implicit collusion?

23 What is a cartel? A group of firms that agree to coordinate their production and pricing decisions, thereby behaving as a monopolist

24 Organization of Petroleum Exporting Countries (OPEC) International Electrical Association (IEA) What are two examples of cartels?

25 Dollars per unit P Quantity per period Cartel Model Where Firms Act as a Monopolist MC 0 Exhibit 5 MR Q D = AR

26 What are the problems of stability? Differences in costs Number of firms New entry Cheating

27 Interdependence - No firm will not take an action unless it considers the reaction from the other firms What distinguishes oligopoly?

28 B and C will not raise their price Imagine 3 identical firms in an industry – A, B, C. What happens if A raises price?

29 B and C will lower their price Imagine 3 identical firms in an industry – A, B, C. What happens if A lowers price?

30 What is a price leader? A firm whose price is adopted by the rest of the industry

31 barometric-firm dominant firm most innovative Who is the price leader?

32 What is cost-plus pricing? A method of determining the price of a good by adding a percentage markup to average variable cost

33 What is game theory? A model that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms

34 What is a duopoly? A market with only two producers, who compete with each other; a type of oligopoly market structure

35 What is strategy? In game theory, the operational plan pursued by a player

36 What is a payoff matrix? In game theory, a table listing the payoffs that each player can expect based on the strategy that each player pursues

37 What is a kinked demand curve? A demand curve that illustrates price stickiness; if one firm cuts prices, others will cut theirs, but if the firm raises prices, others will not change theirs

38 Price per unit P Quantity per period The Kinked Demand Model of Oligopoly 0 Exhibit 7 Q D D' more elastic more inelastic

39 Price per unit P Quantity per period D and MR Curves for the Kinked Demand Model 0 Exhibit 8 Q D1 D2 MR1 MR2

40 How does price under an oligopoly compare to price under perfect competition? Price is usually higher under an oligopoly

41 How do profits under an oligopoly compare to profits under perfect competition? Profits are higher under an oligopoly

42 What is a horizontal merger? A merger in which one firm combines with another firm that produces the same product

43 What is a vertical merger? A merger in which one firm combines with another from which it purchases inputs or to which it sells output

44 What is a conglomerate merger? A merger involving the combination of firms producing in different industries

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