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Monopolistic Competition and Oligopoly

Monopolistic Competition and Oligopoly. These slides supplement the textbook, but should not replace reading the textbook. What is imperfect competition?. A market structure between pure competition and monopoly. What is monopolistic competition?.

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Monopolistic Competition and Oligopoly

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

  2. What isimperfect competition? • Amarket structure between pure competition and monopoly

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

  6. Where are profits maximized or minimized ? • MR = MC

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

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

  9. In monopolistic competition, can economic profit be made in the short run? • Yes! • Positive or negative economic profit can 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. Long Run Equilibrium in Monopolistic Competition • MC • ATC • b • p • Dollars per unit • a • D = AR • MR • 0 • q • Quantity per period • Exhibit 2

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

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

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

  16. What are examples of oligopoly? • Automobiles • Steel • Soup • Cereals

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

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

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

  20. What is explicit collusion? • Cooperation involving direct communication between competing firms about setting prices

  21. What is implicit collusion? • Cooperation involving indirect communication between competing firms about setting prices

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

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

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

  25. What are the problems of stability? • Differences in costs • Number of firms • New entry • Cheating

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

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

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

  29. What is a price leader? • A firm whose price is adopted by the rest of the industry

  30. Who is the price leader? • barometric-firm • dominant firm • most innovative

  31. What iscost-plus pricing? • A method of determining the price of a good by adding a percentage markup to average variable cost

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

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

  34. What is strategy? • In game theory, the operational plan pursued by a player

  35. What is apayoff matrix? • In game theory, a table listing the payoffs that each player can expect based on the strategy that each player pursues

  36. 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

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

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

  39. How does price under an oligopoly compare to price under perfect competition? • Price is usually higher under an oligopoly

  40. How do profits under an oligopoly compare to profits under perfect competition? • Profits are higher under an oligopoly

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

  42. What is avertical merger? • A merger in which one firm combines with another from which it purchases inputs or to which it sells output

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

  44. END

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