Title: Chapter 12: Oligopoly and Monopolistic Competition
1Chapter 12 Oligopoly and Monopolistic Competition
2Characteristics of a monopolistically competitive
market
3Characteristics of a monopolistically competitive
market
- Many buyers and sellers
- Differentiated products
4Characteristics of a monopolistically competitive
market
- Many buyers and sellers
- Differentiated products
- Easy entry and exit
5Relationship to other market models
- Monopolistic competition is similar to perfect
competition in that - There are many buyers and sellers
- There are no barriers to entry or exit
6Relationship to other market models
- Monopolistic competition is similar to perfect
competition in that - There are many buyers and sellers
- There are no barriers to entry or exit
- Monopolistic competition is similar to monopoly
in that - Each firm is the sole producer of a particular
product (although there are close substitutes) - The firm faces a downward sloping demand curve
for its product
7Demand curve facing a monopolistically
competitive firm
8The firms demand curve and entry and exit
- As firms enter a monopolistically competitive
market, the demand facing a typical firm declines
and becomes more elastic.
9Short-run equilibrium in a monopolistically
competitive industry
- Economic profits lead to entry and a reduction in
the demand facing a typical firm.
10Long-run equilibrium in a monopolistically
competitive industry
- Entry continues until economic profit equals zero
for a typical firm. - This equilibrium is often referred to as a
tangency equilibrium.
11Short-run equilibrium with economic losses
12Long-run equilibrium
13Monopolistic competition vs. perfect competition
- A monopolistically competitive firm, in the long
run, has excess capacity (i.e., it produces a
level of output that is below the least-cost
level). - This is a cost of product variety.
14Monopolistic competition and efficiency
- As the number of firms rises, a monopolistically
competitive firms demand curve becomes more
elastic. - As the number of firms in a market expands, the
market approaches a perfectly competitive market. - Thus, economic inefficiency may be smaller when
there is a large number of firms in a
monopolistically competitive market.
15Product differentiation and advertising
- Monopolistically competitive firms may receive
short-run economic profit from successful product
differentiation and advertising. - These profits are, however, expected to disappear
in the long run as other firms copy successful
innovations.
16Location decisions
- Monopolistically competitive firms often locate
near each other to appeal to the median
customer in a geographical region. (e.g., fast
food restaurants and car dealerships)
17Oligopoly
- a small number of firms produce most output,
18Oligopoly
- a small number of firms produce most output.
- a standardized or differentiated product,
19Oligopoly
- a small number of firms produce most output,
- a standardized or differentiated product,
- recognized mutual interdependence,
20Oligopoly
- a small number of firms produce most output,
- a standardized or differentiated product,
- recognized mutual interdependence, and
- difficult entry.
21Strategic behavior
- Strategic behavior occurs when the best outcome
for one party depends upon the actions and
reactions of other parties.
22Kinked demand curve model
- Other firms are assumed to match price decreases,
but not price increases.
23Kinked demand curve model
- Other firms are assumed to match price decreases,
but not price increases. - There is little evidence suggesting that this
model describes the behavior of oligopoly firms.
24Kinked demand curve model
- Other firms are assumed to match price decreases,
but not price increases. - There is little evidence suggesting that this
model describes the behavior of oligopoly firms. - Game theory models are more commonly used to
explain oligopoly markets.
25Game theory
- Examines the payoffs associated with alternative
choices of each participant in the game.
26Game theory examples
27Game theory examples
- Prisoners dilemma
- Duopoly pricing game
28Dominant strategy
- A dominant strategy is one that provides the
highest payoff for an individual for each and
every possible action by rivals.
29Dominant strategy
- A dominant strategy is one that provides the
highest payoff for an individual for each and
every possible action by rivals. - Confession is the dominant strategy in the
prisoners dilemma game. A low price is the
dominant strategy in the duopoly pricing game.
30Dominant strategy
- A dominant strategy is one that provides the
highest payoff for an individual for each and
every possible action by rivals. - Confession is the dominant strategy in the
prisoners dilemma game. A low price is the
dominant strategy in the duopoly pricing game. - It is more difficult to predict the outcome when
no dominant strategy exists or when the game is
repeated with the same players.
31Shared monopoly
- Joint profits are higher when firms behave as a
shared monopoly.
32Shared monopoly
- Joint profits are higher when firms behave as a
shared monopoly. - Such a cartel arrangement is illegal in the U.S.
33Shared monopoly
- Joint profits are higher when firms behave as a
shared monopoly. - Such a cartel arrangement is illegal in the U.S.
- Price leadership
34Shared monopoly
- Joint profits are higher when firms behave as a
shared monopoly - Such a cartel arrangement is illegal in the U.S.
- Price leadership
- Facilitating practices (e.g., cost-plus pricing,
recommended retail prices, etc.)
35Cartels
- Cartels are legal in some countries
- A cartel arrangement can maximize industry
profits - Each firm, though, can increase its profits by
violating the agreement - Cartel agreements have generally been unstable.
36Imperfect information
- Brand name identification serves as a signal of
product quality. Customers are willing to pay a
higher price for products produced by firms that
they recognize. - Product guarantees also serve as a signal of
product quality