Two Market Structures Lie

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Two Market Structures Lie Between Competition
and Monopoly They are Monopolistic
Competition and Oligopoly
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Monopolistic Competition 1. Numerous buyers and
sellers 2. Free entry and exit. 3. Product
differentiation. 4. Information may or may not be
complete.
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Short run equilibrium, its a look a like for
the monopoly equilibria.
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According to theory, monopolistically
competitive industries are OK except for one
thing Excess Capacity Theorem
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Advertising, its economics Monopolistically
Competitive firms are often heavy advertisers.
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Persuasive advertising. Informative
advertising. Advertising as a product
complement.
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Some cases 1. Optometry information lowers
prices. 2. Soda persuasive, its a better
lifestyle to drink __________. 3. Is
advertising a signal of good quality? Bad
quality?
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The End of the Lecture on Monopolistic
Competition One market structure remains,
Oligopoly
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Assumptions under Oligopoly 1. A few
sellers. 2. Nothing else is distinctive.
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The fewer the tougher to predict. The result is
many models, students are taught two or
three 1. Price Leadership. 2. Collusion. 3. Game
Theory.
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Price Leadership Let one firm establish the
price and others follow 1. The leader chooses
his price freely aiming to maximize profits,
MRMC. 2. But, the many other firms are
price takers and their MRPMC. These
conditions result in the competitive solution.
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Collusion Several firms combine into a
cartel and act as one big firm in order to
increase their profits. Thus, they become a
monopoly, no other approach to decision making
would bring in as much profit. They collectively
restrict output and raise price.
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Collusions main problem the temptation to
break off... Consider one of the firms. It
has MR gt MC. Why? Its profits would grow if it
cheated on the cartel. Why? Is it any wonder
that cartels usually break apart on their own?
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Game Theory The distinctive assumption
regarding the interaction of the
oligops Assume They compete head to head to
outdo the other guy (as if they were two Russians
competing at chess).
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How to Play the Game GM and Ford compete by
choosing strategies for their car line, GM
chooses among A,B, and C while Ford
chooses among U,V, and W. (In principle there
could be any number of strategies for each).
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Ford
GM
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Ford
GM
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Ford
GM