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9. Monopolistic Competition & Oligopoly

9. Monopolistic Competition & Oligopoly. Monopolistic Competition Oligopoly. Measuring market dominance. 4-firm conentration ratio % sales from 4 largest firms > 40% then oligopoly < 40% then monopolistic comp. Herfindahl-Hirschman Index (HHI). largest 50 firms

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9. Monopolistic Competition & Oligopoly

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  1. 9. Monopolistic Competition & Oligopoly • Monopolistic Competition • Oligopoly

  2. Measuring market dominance • 4-firm conentration ratio • % sales from 4 largest firms • > 40% then oligopoly • < 40% then monopolistic comp.

  3. Herfindahl-Hirschman Index (HHI) • largest 50 firms • sum square of % market share • used by Justice Department • if monopoly = (100)2 = 10,000

  4. HHI (cont.) • if < 1000 • market is competitive • if > 1800 • market is uncompetitive

  5. Oligopoly • small number of firms • interdependent behavior • barriers to entry

  6. examples • Airlines • Automobiles • Cereal • Soft Drinks

  7. what types of barriers? • economies of scale • auto industry • legal restrictions • brand recognition • cereal, soft drinks • control over essential resource

  8. Firm behavior • no one model of behavior • set of possible behaviors

  9. Cartel • firms collude to act like a single monopolist • restrict output, charge higher price • block entry

  10. Price leadership • informal collusion • dominant firm sets price • other firms follow to avoid a price war • steel, airline, auto industries

  11. cartels are tough to maintain • each firm has output quota • each firm tempted to cheat • tough to block new entry

  12. Collusion and Cartels • firms may collude • divide market • fix prices • illegal in U.S. • examples • OPEC • ADM & others

  13. Monopolistic Competition • large # of firms • product differentiation • compete w/ quality, price, marketing • no one firm dominates • no collusion among firms • free to enter/exit

  14. examples • running shoes • fast food franchises • clothing • cleaning supplies • beauty products

  15. product differentiation • physical differences • color, size, taste ... • location • convenience, drug stores • services • delivery • image • high quality vs. value

  16. Firm Behavior, short run • Tommy Hilfiger Jeans • demand curve downward sloping • less elastic than perfect competition • more elastic than a monopolist • choose price & output • like a monopolist

  17. P, cost MC $70 D MR Q (jeans/day) 150

  18. economic profit P, cost MC $70 ATC D MR Q (jeans/day) 150 ($70-$20)(150) = $7500 $20

  19. Long Run • zero economic profit • why? • economic profit leads to entry • economic loss leads to exit • no entry/exit with zero economic profit

  20. Excess capacity • firms output is not at minimum of ATC • output too small • loss of economic welfare

  21. Advertising & marketing • firms in monopolistic competition spend more on this than perfect competition • cost curves are higher • is this a waste? Or • do consumer benefit from greater selection?

  22. Summary • between perfect competition & monopoly • monopolistic comp. chooses P & Q like a monopolistic • oligopolist behavior interdependent • importance of product differentiation • importance of strategic behavior

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