Prof. Ana Corrales ECO 2023 Notes Ch. 25: Monopolistic Competition & Oligopoly Most firms have distinguishable rather than standardized products Competition occurs on the basis of price, quality, location, service, and advertising

Prof. Ana Corrales ECO 2023 Notes Monopolistic Competition Large number of sellers  Small market shares  No collusion  Independent action Differentiated products  Produce goods with slightly different physical characteristics offering varying degrees of customer service, locational convenience, or claim special qualities for their products  Monopolistic competitors do have some control over price, but it is limited, given numerous potential substitutes  Differentiation is promoted through advertising Easy Entry & Exit

Prof. Ana Corrales ECO 2023 Notes Product Variety Product variety results in a benefit for society Consumers have wide tastes With differentiated products, consumer are offered a wide range of types, styles, brands, and quality

Prof. Ana Corrales ECO 2023 Notes Oligopoly Few, Large Producers Homogeneous (standardized) or Differentiated Products  Industrial v. Consumer goods  Differentiated oligopolies engage in heavy advertising Control over Price, with Mutual Interdependence  Because oligopoly firms are few, each is a “price maker”  Oligopoly must consider how its rival will react to any change in its price, output, product characteristic, or advertising Strategic Behavior: Self-interested behavior that takes into account the action of others Mutual Interdependence: Each firm’s profit depends not entirely on own price and sales strategies but also on those of other firms Entry Barriers similar to Monopoly  Monopoly power as motive for mergers

Prof. Ana Corrales ECO 2023 Notes Collusion and Cartels Collusion: Cooperation with rivals Cartel: Group of producers that typically creates a formal written agreement specifying how much each member will produce and charge To maintain agreed-upon price:  Output is controlled  Market share is divided between members

Prof. Ana Corrales ECO 2023 Notes Overt Collusion: The OPEC Cartel Organization of Petroleum Exporting Countries (OPEC) 11 oil-producing nations Produces 40% of world’s oil

Prof. Ana Corrales ECO 2023 Notes Obstacles to Collusion Demand and Cost Differences for differentiated products Number of Firms: It is more difficult to create and control a cartel if it has a large number of firms Cheating: Temptation for oligopolies to engage in price cutting to increase sales/profit is large; cheating is less likely to occur when it is easy to detect and punishable Recession: Businesses may limit profit reductions/losses by cutting price and gaining sales at the expense of rivals Potential Entry: Greater prices and profits from collusions may attract new entrants. By increasing market supply, profits and prices fall

Prof. Ana Corrales ECO 2023 Notes Price Leadership Model Understanding by which oligopolists can coordinate prices without engaging in collusion The dominant firm initiates price changes and all others follow suit Tactics:  Infrequent Price changes  Communications  Limit Pricing blocks entry of new firms to industry Breakdown of Price Leadership results in Price Wars

Prof. Ana Corrales ECO 2023 Notes Oligopoly and Advertising Product development & advertising are less easily duplicated than price cuts Oligopolists have sufficient resources to engage in product development & advertising Advertising is prevalent in monopolistic competition and oligopoly

Prof. Ana Corrales ECO 2023 Notes Last Word Oligopoly in the Beer Industry Page

Prof. Ana Corrales ECO 2023 Notes Ch. 25 Study Questions 1 (a) & (b)