Monopolistic Competition and Oligopoly

1. CHAPTERTWENTY-FIVE Superior Cheese Monopolistic CompetitionandOligopoly

2. Four Market Models Monopolistic Competition Pure Monopoly Pure Competition Market Structure Continuum

3. Monopolistic Competition Characteristics... • Relatively Large Numbers

4. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share

5. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion

6. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions

7. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions • Product Differentiation

8. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions • Product Differentiation • Product Attributes

9. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions • Product Differentiation • Product Attributes • Services

10. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions • Product Differentiation • Product Attributes • Services • Location

11. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions • Product Differentiation • Product Attributes • Services • Location • Brand Names and Packaging

12. Monopolistic Competition Characteristics... • Relatively Large Numbers • Small Market Share • No Collusion • Independent Actions • Product Differentiation • Product Attributes • Services • Location • Brand Names and Packaging • Some Control Over Price

13. Monopolistic Competition Characteristics... • Easy Entry and Exit

14. Monopolistic Competition Characteristics... • Easy Entry and Exit • Nonprice Competition

15. Monopolistic Competition Characteristics... • Easy Entry and Exit • Nonprice Competition • Advertising

16. Monopolistic Competition Characteristics... • Easy Entry and Exit • Nonprice Competition • Advertising • Monopolistically Competitive Industries

17. Short-Run Price and Output Determination P Monopolistic competitors have an elastic demand curve, but not perfectly elastic... Price and Costs Q Copyright McGraw-Hill, Inc., 1999

18. Short-Run Price and Output Determination P Price and Costs D Q Copyright McGraw-Hill, Inc., 1999

19. Short-Run Price and Output Determination P Price and Costs D MR Q Copyright McGraw-Hill, Inc., 1999

20. Short-Run Price and Output Determination MC P Price and Costs D MR Q Q Copyright McGraw-Hill, Inc., 1999

21. Short-Run Price and Output Determination MC P ATC Price and Costs D MR Q Q Copyright McGraw-Hill, Inc., 1999

22. Short-Run Price and Output Determination Expect New Competitors MC P ATC Price and Costs Economic Profits D MR Q Q

23. How would short-run losses be different? Short-Run Price and Output Determination Expect New Competitors MC P ATC Price and Costs Economic Profits D MR Q Q

24. Short-Run Price and Output Determination MC P ATC Economic Losses Price and Costs Expect Less Competitors D MR Q Q

25. How would the long-run differ? Short-Run Price and Output Determination MC P ATC Economic Losses Price and Costs Expect Less Competitors D MR Q Q

26. Short-Run Price and Output Determination Expect New Competitors MC P ATC Price and Costs Economic Profits D MR Q Q

27. Short-Run Price and Output Determination Long-run equilibrium MC P ATC P = MC Price and Costs D MR Q Q Q @ ATC Min ?

28. Monopolistic Competition and Economic Efficiency

29. Monopolistic Competition and Economic Efficiency • Not Productively Efficient

30. Monopolistic Competition and Economic Efficiency • Not Productively Efficient • Not Allocatively Efficient

31. Monopolistic Competition and Economic Efficiency • Not Productively Efficient • Not Allocatively Efficient • Excess Capacity

32. Monopolistic Competition and Economic Efficiency • Not Productively Efficient • Not Allocatively Efficient • Excess Capacity Nonprice Competition

33. Monopolistic Competition and Economic Efficiency • Not Productively Efficient • Not Allocatively Efficient • Excess Capacity Nonprice Competition • Product Differentiation

34. Monopolistic Competition and Economic Efficiency • Not Productively Efficient • Not Allocatively Efficient • Excess Capacity Nonprice Competition • Product Differentiation • Product Development

35. Features of a Monopolistic Competitive Markets: 1. Many sellers 2. Unique Products that have close or identical substitutes: Big Mac v Whopper 3. Small barrier to entry or exit 4. Some market power exists 5. Price is greater than MR, Separate DARP and MR curves 6. Non price competition and advertising exist 7. Profits maximized at the Quantity and Price where MC = MR 8. Excess or Economic Profits in the Short Run only (P>ATC) 9. Profits must be Normal in the Long Run (P=ATC) 10. Firms should shut down when P < AVC 11. Excess capacity exists in terms of potential output 12. Demand is relatively elastic by comparison to monopoly 13. Example market - Minimarts, Fast food at local franchises 14. This market is much closer to perfect competition than pure monopoly

36. Four Market Models Oligopoly Pure Monopoly Pure Competition Monopolistic Competition Market Structure Continuum

37. Oligopoly: Characteristics

38. Oligopoly: Characteristics • Oligopoly Defined

39. Oligopoly: Characteristics • Oligopoly Defined • Homogeneous or Differentiated Products

40. Oligopoly: Characteristics • Oligopoly Defined • Homogeneous or Differentiated Products • Control over Price

41. Oligopoly: Characteristics • Oligopoly Defined • Homogeneous or Differentiated Products • Control over Price • Mutual Interdependence

42. Oligopoly: Characteristics • Oligopoly Defined • Homogeneous or Differentiated Products • Control over Price • Mutual Interdependence • Entry Barriers

43. Oligopoly: Characteristics • Oligopoly Defined • Homogeneous or Differentiated Products • Control over Price • Mutual Interdependence • Entry Barriers • Mergers

44. Oligopoly: Characteristics • Concentration Ratios Ratios that look at what the concentration of firms are in the industry.

45. Oligopoly: Characteristics • Concentration Ratios • - Herfindahl Index – The larger • the index number the higher the • concentration of the industry.

46. A B $12 $15 $12 $6 D C $6 $8 $15 $8 Oligopoly Behavior A Game Theory Overview... RareAir’s Price Strategy High Low High Uptown’s Price Strategy Low

47. A B $12 $15 $12 $6 D C $6 $8 $15 $8 Oligopoly Behavior A Game Theory Overview... RareAir’s Price Strategy High Low Greatest Combined Profit High Uptown’s Price Strategy Low

48. A B $12 $15 $12 $6 D C $6 $8 $15 $8 Oligopoly Behavior A Game Theory Overview... RareAir’s Price Strategy High Low Independent Actions Stimulate Response High Uptown’s Price Strategy Low

49. A B $12 $15 $12 $6 D C $6 $8 $15 $8 Oligopoly Behavior A Game Theory Overview... RareAir’s Price Strategy High Low Independent Actions Stimulate Response Gravitating to the Worst Case High Uptown’s Price Strategy Low

50. A B $12 $15 $12 $6 D C $6 $8 $15 $8 Oligopoly Behavior A Game Theory Overview... RareAir’s Price Strategy High Low Collusion Invites a Different Solution High Uptown’s Price Strategy Low