Transcript Chapter 13 Student PowerPoint Presentation

Chapter 13
Monopolistic Competition and
Oligopoly
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Monopolistic Competition
• Monopolistic competition
• Relatively large number of sellers
• Product differentiation
• Easy entry and exit
• Nonprice competition like advertising
LO1
13-2
Monopolistically Competitive
Industries
• Industry concentration
• Measured by 4-firm concentration ratio
• Percentage of sales by 4 largest firms
4-firm CR =
output of four largest firms
total output in the industry
• Herfindahl index
• Sum of squared market shares
HI = (%S1)2 + (%S2)2 + (%S3)2 + …. + (%Sn)2
LO1
13-3
Price and Output in Monopolistic
Competition
• Demand is highly elastic
• Short run profit or loss
• Produce where MR = MC
• Long run only a normal profit
• Entry and exit
LO2
13-4
Monopolistic Competition and
Efficiency
• Monopolistic competition inefficient
• Productive inefficiency because P > min ATC
• Allocative inefficiency because P > MC
• Excess capacity
LO3
13-5
Product Variety
• The firm constantly manages price, product,
and advertising
• Better product differentiation
• Better advertising
• The consumer benefits by greater array of
choices and better products
• Types and styles
• Brands and quality
LO4
13-6
Oligopoly
• Oligopoly
• A few large producers
• Homogeneous oligopoly
• Differentiated oligopoly
• Limited control over price
• Entry barriers
• Mergers
LO5
13-7
Oligopolistic Industries
• Four-firm concentration ratio
• 40% or more to be an oligopoly
• Shortcomings
• Localized markets
• Interindustry competition
• Import competition
• Dominant firms
LO5
13-8
Oligopoly Behavior
• Oligopolies display strategic behavior
• Mutual interdependence
• Collusion
• Incentive to cheat
• Game theory
• Prisoner’s dilemma
LO6
13-9
Game Theory Overview
RareAir’s price strategy
LO6
High
Uptown’s price strategy
•2 competitors
•2 price strategies
•Each strategy has
a payoff matrix
•Greatest
combined
profit
•Independent
actions
stimulate a
response
A
$12
Low
B
$15
High
$12
C
$6
$6
D
$8
Low
$15
$8
13-10
Game Theory Overview
RareAir’s price strategy
LO6
High
Uptown’s price strategy
•Independently
lowered prices in
expectation of
greater profit
leads to worst
combined
outcome
•Eventually low
outcomes make
firms return to
higher prices.
A
$12
Low
B
$15
High
$12
C
$6
$6
D
$8
Low
$15
$8
13-11
Three Oligopoly Models
•
•
•
•
LO7
Kinked-demand curve
Collusive pricing
Price leadership
Reasons for 3 models
• Diversity of oligopolies
• Complications of interdependence
13-12
Kinked-Demand Theory
• Noncollusive oligopoly
• Uncertainty about rivals reactions
• Rivals match any price change
• Rivals ignore any price change
• Assume combined strategy
• Match price reductions
• Ignore price increases
LO7
13-13
Cartels and Other Collusion
Price and costs
MC
ATC
P0
A0
MR=MC
Economic
profit
MR
Q0
LO7
D
Quantity
13-14
Overt Collusion
• A cartel is a group of firms or nations that
collude
• Formally agreeing to the price
• Sets output levels for members
• Collusion is illegal in the United States
• OPEC
LO7
13-15
Obstacles to Collusion
•
•
•
•
•
•
LO7
Demand and cost differences
Number of firms
Cheating
Recession
New entrants
Legal obstacles
13-16
Price Leadership Model
• Price leadership
• Dominant firm initiates price changes
• Other firms follow the leader
• Use limit pricing to block entry of new firms
• Possible price war
LO7
13-17
Oligopoly and Advertising
• Oligopolies commonly compete though
product development and advertising
• Less easily duplicated than a price change
• Financially able to advertise
LO8
13-18
Positive Effects of Advertising
• Low-cost way of providing information to
consumers
• Enhances competition
• Speeds up technological progress
• Can help firms obtain economies of scale
LO8
13-19
Oligopoly and Efficiency
• Oligopolies are inefficient
• Productively inefficient because P > min ATC
• Allocatively inefficient because P > MC
• Qualifications
• Increased foreign competition
• Limit pricing
• Technological advance
LO9
13-20