Transcript Chapter 23
Monopolistic Competition and Oligopoly These slides supplement the textbook, but should not replace reading the textbook What is imperfect competition? A market structure between pure competition and monopoly 2 What is monopolistic competition? A market structure in which a large number of firms sell close substitutes which are different enough that each firm’s demand curve slopes downward 3 How can firms differentiate under monopolistic competition? Physical differences Location Services Product image 4 What are examples of monopolistic competition? Restaurants Clothing stores Grocery stores Jewelry stores 5 Where are profits maximized or minimized ? MR = MC 6 Dollars per unit The Firm Monopolistic Competition in the Short Run p b c c e MC ATC Profit MR D = AR 0 Exhibit 1 (a) q Quantity per period 7 Dollars per unit The Firm Monopolistic Competition in the Short Run c c Loss b p MC ATC AVC 0 Exhibit 1 (b) D=AR MR q Quantity per period 8 In monopolistic competition, can economic profit be made in the short run? Yes! Positive or negative economic profit can be made in the short run 9 What is long-run profit in monopolistic competition? Zero 10 Why is economic profit zero over the long-run? Because if economic profits are being made more firms will enter into the industry; if losses are being made more firms will leave the industry 11 Dollars per unit Long Run Equilibrium in Monopolistic Competition MC ATC p b a D = AR MR 0 Exhibit 2 q Quantity per period 12 How does monopolistic competition compare with perfect competition? They both make a normal profit over the long-run 13 Dollars per unit Perfect Competition MC ATC p d = AR 0 Exhibit 3 (a) q Quantity per period 14 What is an oligopoly? A market structure characterized by a small number of firms whose behavior is interdependent 15 What are examples of oligopoly? Automobiles Steel Soup Cereals 16 What is a possible explanation for the formation of oligopolies? Barriers to entry, such as economies of scale or a high cost of entry 17 Dollars per unit Economies of Scale as Barriers to Entry ca a b cb 0 Exhibit 4 Autos per year S M 18 What is a collusion? An agreement among firms to divide the market or to fix the market price to maximize economic profit 19 What is explicit collusion? Cooperation involving direct communication between competing firms about setting prices 20 What is implicit collusion? Cooperation involving indirect communication between competing firms about setting prices 21 What is a cartel? A group of firms that agree to coordinate their production and pricing decisions, thereby behaving as a monopolist 22 What are two examples of cartels? Organization of Petroleum Exporting Countries (OPEC) International Electrical Association (IEA) 23 Dollars per unit Cartel Model Where Firms Act as a Monopolist MC P D = AR 0 Exhibit 5 MR Q Quantity per period 24 What are the problems of stability? Differences in costs Number of firms New entry Cheating 25 What distinguishes oligopoly? Interdependence - No firm will not take an action unless it considers the reaction from the other firms 26 Imagine 3 identical firms in an industry – A, B, C. What happens if A raises price? B and C will not raise their price 27 Imagine 3 identical firms in an industry – A, B, C. What happens if A lowers price? B and C will lower their price 28 What is a price leader? A firm whose price is adopted by the rest of the industry 29 Who is the price leader? barometric-firm dominant firm most innovative 30 What is cost-plus pricing? A method of determining the price of a good by adding a percentage markup to average variable cost 31 What is game theory? A model that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms 32 What is a duopoly? A market with only two producers, who compete with each other; a type of oligopoly market structure 33 What is strategy? In game theory, the operational plan pursued by a player 34 What is a payoff matrix? In game theory, a table listing the payoffs that each player can expect based on the strategy that each player pursues 35 What is a kinked demand curve? A demand curve that illustrates price stickiness; if one firm cuts prices, others will cut theirs, but if the firm raises prices, others will not change theirs 36 Price per unit The Kinked Demand Model of Oligopoly more elastic more inelastic P D ' D 0 Exhibit 7 Q Quantity per period 37 Price per unit D and MR Curves for the Kinked Demand Model 1 D P 1 MR 0 Exhibit 8 Q 2 D 2 MR Quantity per period 38 How does price under an oligopoly compare to price under perfect competition? Price is usually higher under an oligopoly 39 How do profits under an oligopoly compare to profits under perfect competition? Profits are higher under an oligopoly 40 What is a horizontal merger? A merger in which one firm combines with another firm that produces the same product 41 What is a vertical merger? A merger in which one firm combines with another from which it purchases inputs or to which it sells output 42 What is a conglomerate merger? A merger involving the combination of firms producing in different industries 43 END