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Monopolistic Competition and Oligopoly

Monopolistic Competition and Oligopoly. Chapter 12. Monopolistic Competition. Many firms, like pure competition No barriers to entry Product differentiation Branding Advertising Firms’ products are poor substitutes Firms have some market power over price

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Monopolistic Competition and Oligopoly

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  1. Monopolistic Competitionand Oligopoly Chapter 12

  2. Monopolistic Competition • Many firms, like pure competition • No barriers to entry • Product differentiation • Branding • Advertising • Firms’ products are poor substitutes • Firms have some market power over price • therefore face downward-sloping demand curves at the firm level • and downward-sloping MR curves

  3. Chapter 25 Table 25.1

  4. Chapter 25 Figure 25.1(a) Short-run Profits under Monopolistic Competition

  5. Chapter 25 Figure 25.1(b) Short-run losses under Monopolistic Competition

  6. Chapter 25 Figure 25.1(c) Long-run Equilibrium Reached through Firm Entry or Exit

  7. Chapter 25 Figure 25.2 Long-run Inefficiency

  8. Oligopoly • Few large firms • Products may be either homogeneous or differentiated • Firms have market power but it’s limited by the impact of the other oligopolists • Strategic behavior • Mutual interdependence • Entry barriers

  9. Quantifying Oligopoly • Concentration Ratio = % industry output sold by n largest firms e.g., n = 4 • Herfindahl Index = (%S1)2 + (%S2)2 + (%S3)2 +… + (%Sn)2 includes data on whole industry

  10. Chapter 25 Table 25.2

  11. Chapter 25 Figure 25.3 Payoff Matrix for a Two-firm Oligopoly

  12. Chapter 25 Figure 25.4(a) Kinky Demand

  13. Chapter 25 Figure 25.4(b) Discontinuous MR with Kinky Demand

  14. Chapter 25 Figure 25.5 Incentive for Oligopolistic Collusion

  15. Incentives to Cheat • Participation in a Cartel rewards Oligopolists with higher prices and profits • but colluding firms must reduce output to receive higher prices • The incentive to cheat: • Firms can earn even higher revenues and profits by selling a larger amount than they agreed • This benefits consumers • but harms the oligopoly partners in the cartel

  16. Chapter 25 Table 25.3

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