Chapter 10 Monopolistic Competition and Oligopoly

Key Concepts  monopolistic competition  oligopoly  high-price/low-output equilibrium  cartel  collusion  Cournot model 古诺模型  output-reaction curve  Stackelberg model 斯泰克伯格模型  first-mover advantage 先行者利益 优先模型  price signaling  price leadership

 barometric price leadership  Bertrand model 伯川德模型  price-reaction curve  contestable markets theory  Sweezy model 斯威齐模型  kinked demand curve  oligopoly theory  economic census  North American Industry Classification System (NAICS)  concentration ratios  Herfindahl-Hirschmann Index (HHI) 赫芬德尔指数

一、 Monopolistic Competition versus Oligopoly  Monopolistic Competition Large number of sellers that offer differentiated products. Normal profit opportunity in long-run equilibrium.  Oligopoly Few sellers. Economic profits are possible in long-run equilibrium.

 ***Dynamic Nature of Competition Timely market structure information is required for managerial investment decisions

二、 Monopolistic Competition 1.Features of monopolistic Competition  Many buyers and sellers.  Product heterogeneity.  Free entry and exit.  Perfect information.  Opportunity for normal profits in long-run equilibrium.

Figure 10.1

2.Price/Output Decisions  Set M π = MR - MC = 0 to Max profits  MR=MC at optimal output.  No durable economic profits because P=AR=AC.

Figure 10.2

Monopolistic Competition Process  Short-run Monopoly Equilibrium To take full advantage of S.R monopoly. P > MR = MC.  Long-run: Normal profit P=AC at a point above minimum LRAC.

Illustration of Monopolistic Competition P271 TR= 20,000Q-15.6 TC=400, Q P=? MR=? MC=?

 Profit maximization in the short run: Patent  Profit maximization in the long run:  P.C Long run: P=MR=MC=AC

二、 Oligopoly 1.Characteristics Few sellers. Homogenous or unique products. Blockaded entry and exit. Imperfect dissemination of information. Opportunity for above-normal (economic) profits in long-run equilibrium.

2.Cartels and Collusion  Overt and Covert Agreements Cartels operate under formal agreements.  Powerful cartels function as a monopoly. Collusion exists when firms reach secret, covert agreements.  Enforcement Problem Cartels are typically rather short-lived because coordination problems often lead to cheating. Cartel subversion can be extremely profitable. Detecting the source of secret price concessions can be extremely difficult.

Fig 10.4

Oligopoly Output-Setting Models  Cournot Oligopoly  Cournot equilibrium output is found by simultaneously solving output- reaction curves for both competitors.  Cournot equilibrium output exceeds monopoly output but is less than competitive output.

Stackelberg Oligopoly Stackelberg model posits a first- mover advantage. Price wars severely undermine profitability for both leading and following firms. Price signaling can reduce uncertainty in oligopoly markets. Price leadership occurs when firms follow the industry leader ’ s pricing policy.

Oligopoly Price-Setting Models  Bertrand Oligopoly: Identical Products The Bertrand model focuses upon the price reactions. The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.  Bertrand Oligopoly: Differentiated Products The Bertrand model demonstrates how price- setting oligopolists profit with differentiated products.

Sweezy Oligopoly  Sweezy model predicts “ sticky ” prices.  Sweezy model explains why prices in oligopoly markets sometimes fail to respond to marginal cost change.

Oligopoly Model Comparison  Cournot model does not incorporate output reactions.  Bertrand model does not incorporate price reactions.  Stackelberg model explains first-mover advantages, but does not explain countermoves.  Sweezy model is incomplete.  Modeling behavior in oligopoly markets is difficult.

Market Structure Measurement  Economic Markets An economic market consists of all individuals and firms willing and able to buy or sell. When cross-price elasticities are large and positive, goods are competing products.  Economic Census The economic census provides a comprehensive statistical profile of the economy. Industry statistics are classified using the North American Industry Classification System (NAICS).

Measures of Market Concentration  Concentration Ratios Group market share data are called concentration ratios. CR i = ∑ X i, where X i is market share of the ith leading firm.  CR i = 100 for monopoly.  CR i ≈ 0 for a perfectly competitive industry.

 Herfindahl-Hirschmann Index Calculated in percentage terms, the HHI is the sum of squared market shares for all competitors. HHI = ∑ X i 2, where X i 2 =squared market share of the ith firm.  HHI = 10,000 for monopoly.  HHI ≈ 0 for a perfectly competitive industry.

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