Ch. 25: Monopolistic Competition & Oligopoly

1. Ch. 25: Monopolistic Competition & Oligopoly • Most firms have distinguishable rather than standardized products • Competition occurs on the basis of price, quality, location, service, and advertising Prof. Ana Corrales ECO 2023 Notes

2. Monopolistic Competition • Large number of sellers • Small market shares • No collusion • Independent action • Differentiated products • Produce goods with slightly different physical characteristics offering varying degrees of customer service, locational convenience, or claim special qualities for their products • Monopolistic competitors do have some control over price, but it is limited, given numerous potential substitutes • Differentiation is promoted through advertising • Easy Entry & Exit Prof. Ana Corrales ECO 2023 Notes

3. Product Variety • Product variety results in a benefit for society • Consumers have wide tastes • With differentiated products, consumer are offered a wide range of types, styles, brands, and quality Prof. Ana Corrales ECO 2023 Notes

4. Oligopoly • Few, Large Producers • Homogeneous (standardized) or Differentiated Products • Industrial v. Consumer goods • Differentiated oligopolies engage in heavy advertising • Control over Price, with Mutual Interdependence • Because oligopoly firms are few, each is a “price maker” • Oligopoly must consider how its rival will react to any change in its price, output, product characteristic, or advertising • Strategic Behavior: Self-interested behavior that takes into account the action of others • Mutual Interdependence: Each firm’s profit depends not entirely on own price and sales strategies but also on those of other firms • Entry Barriers similar to Monopoly • Monopoly power as motive for mergers Prof. Ana Corrales ECO 2023 Notes

5. Collusion and Cartels • Collusion: Cooperation with rivals • Cartel: Group of producers that typically creates a formal written agreement specifying how much each member will produce and charge • To maintain agreed-upon price: • Output is controlled • Market share is divided between members Prof. Ana Corrales ECO 2023 Notes

6. Overt Collusion: The OPEC Cartel • Organization of Petroleum Exporting Countries (OPEC) • 11 oil-producing nations • Produces 40% of world’s oil Prof. Ana Corrales ECO 2023 Notes

7. Obstacles to Collusion • Demand and Cost Differences for differentiated products • Number of Firms: It is more difficult to create and control a cartel if it has a large number of firms • Cheating: Temptation for oligopolies to engage in price cutting to increase sales/profit is large; cheating is less likely to occur when it is easy to detect and punishable • Recession: Businesses may limit profit reductions/losses by cutting price and gaining sales at the expense of rivals • Potential Entry: Greater prices and profits from collusions may attract new entrants. By increasing market supply, profits and prices fall Prof. Ana Corrales ECO 2023 Notes

8. Price Leadership Model • Understanding by which oligopolists can coordinate prices without engaging in collusion • The dominant firm initiates price changes and all others follow suit • Tactics: • Infrequent Price changes • Communications • Limit Pricing blocks entry of new firms to industry • Breakdown of Price Leadership results in Price Wars Prof. Ana Corrales ECO 2023 Notes

9. Oligopoly and Advertising • Product development & advertising are less easily duplicated than price cuts • Oligopolists have sufficient resources to engage in product development & advertising • Advertising is prevalent in monopolistic competition and oligopoly Prof. Ana Corrales ECO 2023 Notes

10. Last Word • Oligopoly in the Beer Industry • Page 480-481 Prof. Ana Corrales ECO 2023 Notes

11. Ch. 25 Study Questions • 1 (a) & (b) • 10 • 11 • 13 Prof. Ana Corrales ECO 2023 Notes