Oligopoly - Cornell University
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Transcript Oligopoly - Cornell University
Monopolistic Competition
1
Market Structures - Review
Competitive:
many firms, identical products
Monopoly: single firm, no close substitutes
Oligopoly: several firms, similar products,
degree of product differentiation varies
depending upon the market
Monopolistic competition: many firms, similar
products, slightly differentiated products
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Competitive Market
This
is the classic
“textbook” market structure.
Firms in a competitive
market all make a product
that is perfectly
substitutable: all
demanders are equally
satisfied with any supplier’s
product. Firms are price
takers.
Hot dogs!
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Monopoly
The
single seller makes
a product that has no
good substitute.
Other firms may be able
to produce the good or
service but choose not to
enter the market or are
barred from it. Firms are
price makers.
Some pharmaceuticals
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Oligopoly
A few
sellers make
products that are good,
but not perfect,
substitutes.
Consumers can be
induced to change
suppliers but have only
a limited number of
choices.
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Monopolistic Competition
The market has
many firms but each
supplier’s product is
differentiated.
Consumers can be
induced to change
brands but they
have brand
preferences.
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Question
What
is the appropriate market structure
model for each of these products or firms:
competitive, monopoly, oligopoly,
monopolistic competition?
–
–
–
–
–
–
–
–
The Campus Store
Kinko’s
Pepperidge Farm’s Whole Wheat Bread
PowerMac computer
Windows computer
Viagra
Morton salt
AT&T long distance
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Answers
The Campus Store: most products competitive, textbooks
oligopoly
Kinko’s: monopolistic competition (differentiated service)
Pepperidge Farm’s Whole Wheat Bread: competition or
monopolistic competition (slightly differentiated recipes)
PowerMac computer and clones: monopoly, under license.
Windows computer: monopolistic competition (differentiated
features)
Viagra: monopoly
Morton salt: competitive
AT&T long distance: oligopoly
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Monopolistic Competition
Structure:
– Several firms in the market.
– Producing differentiated products.
– “Free” entry and exit.
– Full and symmetric information.
1st
and 3rd smack of perfect competition.
2nd adds a monopoly ingredient.
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On Differentiation
Could
be:
– actual: taste, color, location, service,
etc.
– perceived: L.e.i. jeans vs. Wranglers!
Advertising
often plays a big role in
monopolistically competitive markets
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An Historical Note:
Intellectual “parents”
– Joan Robinson (economist at Cambridge in
the U.K.)
– Edward Chamberlin (economist at Harvard in
Cambridge, MA)
– Both pioneered the work on monopolistic
competition in the early 1930’s.
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Monopolistic Competition Short Run Conduct
The monopolistically competitive firm looks and acts just like a minimonopolist.
Example: Gloria Vanderbilt Jeans
srmc
$
sratc
PMC
atc
d
xMC
mr
x
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Monopolistic Competition Long Run Conduct
Free entry will force
firm long run
economic profits to
zero.
So: 1) profit max;
2) zero profit; and
3) a downward
sloping firm demand
and corresponding
marginal revenue.
Firm demand will be
tangent to its long
run average total
cost curve.
$
lratc
lrmc
PMC
d
xMC
mr
x
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Why tangent?
Firms profit maximize but free entry will force
firm long run economic profits to zero.
– 1) profit max implies that mr=mc at xmc
– 2) zero profit implies that P=lratc at xmc
– 3) product differentiation implies a downward
sloping firm demand and corresponding marginal
revenue
Firm demand must be tangent to the long run
average total cost curve - which must occur to
the left of the lratc curve’s minimum point.
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Monopolistic CompetitionPerformance
Efficiency:
– Is the monopolistically competitive firm Pareto
Efficient? That is, at xMC is net social surplus
maximized? Does $MB=$MC at xMC?
» answer: No.
– Is the monopolistically competitive firm productively
efficient? Does the firm operate at minimum efficient
scale?
» answer: NO! There is “excess capacity.”
– Is this “excess capacity” bad?
– Isn’t variety really the spice of life?
Don’t forget there’s always equity to consider, too.
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