Transcript Chapter 13 Between Competition and Monopoly

Between Competition
and Monopoly:
Monopolistic Competition
and Oligopoly
Contents
● Monopolistic Competition
● Oligopoly
● Monopolistic Competition, Oligopoly, and
Public Welfare
● A Glance Backward: Comparing the Four
Market Forms
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A Dose of Reality
● Monopolistic Competition is the most
widespread industry structure in the U.S.
● Output generated by oligopolistic industries
generates more than half of U.S. GDP
♦ GDP – gross domestic product
♦ Roughly speaking – total annual output
● Analysis is complicated – won’t say much
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Monopolistic Competition
● Characteristics of Monopolistic Competition
♦ Many sellers
♦ Freedom of entry and exit
♦ Perfect information
♦ Heterogeneous products
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Monopolistic Competition
● Characteristics of Monopolistic Competition
♦ First three characteristics same as those for
perfect competition.
♦ Fourth is an important distinction.
♦ Demand curve that every firm faces is
negatively sloped.
♦ Majority of U.S. firms are in this type of
market structure.
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Monopolistic Competition
● Price and Output Determination under
Monopolistic Competition
♦ MR = MC rule applies for setting output.
■i.e. individual firm acts like monopoly
♦ Long-run equilibrium: the firm’s demand
curve must be tangent to its average cost curve.
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1: Short-Run Equilibrium
Under Monopolistic Competition
FIGURE
MC
Price per Gallon
AC
$1.80
$1.50
1.40
$1.00
P
C
E
D
MR
12,000
Gallons of Gasoline per Week
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2: Long-Run Equilibrium
Under Monopolistic Competition
FIGURE
MC
Price per Gallon
AC
$1.45
$1.35
P
M
E
D
MR
10,000
15,000
Gallons of Gasoline per Week
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Excess Capacity Theorem
● Under monopolistic competition, in the long
run the firm will produce an output lower
than that which minimizes its unit costs.
● Hence, unit costs will be higher than
necessary.
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Excess Capacity Theorem
● Achievement of minimum average costs
would require fewer but larger firms.
● This inefficiency may, however, be a
reasonable price to pay for providing a large
range of consumer choice.
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Oligopoly
● Oligopoly = market dominated by a few
sellers, at least several of which are large
enough relative to the total market that they
can influence the market price
● Oligopoly  more intense competition
than pure competition
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Oligopoly
● Why Oligopolistic Behavior is So Difficult
to Analyze
♦ Oligopolistic firms interact with each other in
complex ways, and almost anything can and
sometimes does happen under oligopoly.
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Oligopoly
● Lines of Attack:
♦ Ignore interdependence
♦ Strategic interaction
♦ Cartels
♦ Price leadership and tacit collusion
● To understand everything except first point,
you must understand Game Theory
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Oligopoly and Game Theory
● Game Theory analyzes problems where
agents account for others’ actions when
taking a decision
● Ex: duopoly – two firms serving one market
♦ Each firm supplies half of total quantity
♦ Choice of firm 1 affects choice of firm 2 and
vice versa
● Will study Game Theory after Midterm 2
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Monopolistic Competition,
Oligopoly, & Public Welfare
● Behavior is so varied that it is hard to come
to a simple conclusion about welfare
implications.
● In many circumstances, the behavior of
monopolistic competitors and oligopolists
falls short of the social optimum.
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Monopolistic Competition,
Oligopoly, & Public Welfare
● Oligopolistic market can be perfectly
contestable:
♦ If firms can enter and exit without losing the
money they have invested
● If so, then the performance of the firms is
likely to be close to perfectly competitive
● And thus, socially efficient
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Comparing the Four Market
Forms
● Perfect competition and pure monopoly are
uncommon in reality.
● Many monopolistically competitive firms
exist.
● Oligopoly firms account for the largest
share of the economy’s output.
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Comparing the Four Market
Forms
● Profits are zero in long-run equilibrium
under perfect competition and monopolistic
competition because of free entry and exit.
● Consequently, AC = AR = P in long-run
equilibrium under these two market forms.
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Comparing the Four Market
Forms
● In equilibrium, MC = MR for the profitmaximizing firm under any market form.
● In the equilibrium of the oligopoly firm,
MC may be unequal to MR.
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Comparing the Four Market
Forms
● Perfectly competitive firm and industry
theoretically  efficient allocation of
resources.
● Monopoly and monopolistic competition are
likely  inefficient allocation of resources.
● Under oligopoly, almost anything can
happen,  impossible to generalize about
its vices or virtues.
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5: Attributes of the Four
Market Forms
TABLE
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