
Monopolistic Competitionand 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 • therefore face downward-sloping demand curves at the firm level • and downward-sloping MR curves
Chapter 25 Figure 25.1(a) Short-run Profits under Monopolistic Competition
Chapter 25 Figure 25.1(b) Short-run losses under Monopolistic Competition
Chapter 25 Figure 25.1(c) Long-run Equilibrium Reached through Firm Entry or Exit
Chapter 25 Figure 25.2 Long-run Inefficiency
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
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
Chapter 25 Figure 25.3 Payoff Matrix for a Two-firm Oligopoly
Chapter 25 Figure 25.4(a) Kinky Demand
Chapter 25 Figure 25.4(b) Discontinuous MR with Kinky Demand
Chapter 25 Figure 25.5 Incentive for Oligopolistic Collusion
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