[ 4.3 ] Monopolistic Competition and Oligopoly

Characteristics of Monopolistic Competition Four Conditions of Monopolistic Competition Many Firms-Do not have high start up cost Few barriers to entry Little control of price-If the price is too high, consumers will buy rival’s product Differentiated products- The ability to differentiate goods is the main way that monopolistic competition differs from pure competition.  Differentiation enables a monopolistically competitive seller to profit from the differences between his or her products and competitors’ products.

Characteristics of Monopolistic Competition The market for jeans is monopolistically competitive because jeans can vary by size, color, style, and designer.

Characteristics of Monopolistic Competition Under conditions of monopolistic competition, prices of similar products are not identical but are usually close to one another.

Non-price Competition The ability to differentiate products means that firms do not have to compete on price alone. The alternative is non-price competition, or competition through ways other than lower prices. Non-price competition takes several different forms.

Non-price Competition Factors Physical characteristics-new size, color, shape, texture or taste. ex. Clothes, Pens, Cars and Toothpaste You can probably describe a “car” in only a few words, but factories around the world manufacture thousands of car models to fit a range of personalities, jobs, families, and incomes

Non-price Competition Factors Location, Location, Location: Some goods can be differentiated by where they are sold. Gas stations, movie theaters, and grocery stores succeed or fail based on their locations A gas station in the middle of the desert can charge more than the corner Stripes

Non-price Competition Location is one characteristic of non-price competition. Stores located on Rodeo Drive, the exclusive shopping area in Beverly Hills, California, shown here, sell many expensive goods.

Non-price Competition Factors Service Level: sellers can charge higher prices because they offer their customers a high level of service. Chili's can charge more than McDonalds because they provide servers.

Non-price Competition Factors Advertising, image, or status: Firms use advertising to point out differences between their own offerings and other products. A white Nike shirt cost more than a white Hanes shirt

Prices, Output, and Profits Economists study prices, output, and profits when comparing market structures. They find that under monopolistic competition, the market looks very much as it would under pure competition.

Prices, Output, and Profits Production Costs and Variety

Prices Prices under monopolistic competition will be higher than they would be in pure competition, because firms have some power to raise prices.  However, if a monopolistically competitive firm raised prices too high, most customers would buy the cheaper product.

Output The law of demand says that output and price are negatively related. As one rises, the other falls. Monopolistically competitive firms sell their products at higher prices than do purely competitive firms, but at lower prices than a monopoly. As a result, total output under monopolistic competition falls somewhere between that of monopoly and that of pure competition.

Profits  Monopolistically competitive firms earn just enough to cover all of their costs, including salaries for the workers.

 If a monopolistically competitive firm started to earn profits well above its costs, two market trends would work to take those profits away. fierce competition would encourage rivals to find new ways to differentiate their products and lure customers back. new firms will enter the market with slightly different products that cost less than the market leader’s. 

Prices, Output, and Profits Celebrity endorsements are one way that rival companies differentiate their products. Here, actress Elizabeth Taylor poses with a perfume that she helped create and sell.

Production Costs and Variety Firms in monopolistic competition may not be able to produce their goods at the lowest possible average cost. 

Prices, Output, and Profits Analyze Charts How are pure competition and monopolistic competition similar? How are they different?

Characteristics of Oligopoly Oligopoly-market dominated by a few large, profitable firms. Oligopoly looks like an imperfect form of monopoly. Some economists call an industry an oligopoly if the four largest firms produce at least 70 to 80 percent of the output.

Characteristics of Oligopoly Analyze Graphs Are the music companies in this graph an example of an oligopoly? Why or why not?

Characteristics of Oligopoly The video game console industry is an oligopoly because a few large companies dominate the industry.

Characteristics of Oligopoly Barriers to Entry-An oligopoly can form when significant barriers to entry keep new companies from entering the market to compete with existing firms. These barriers can be technological, or they can be created by a system of government licenses or patents. High start-up costs such as expensive machinery and large production facilities present additional barriers to entry. 

Characteristics of Oligopoly Cooperation and Collusion oligopolistic firms often seem to work together as a monopoly, even when they are not actually doing so. three practices that concern government the most are price leadership, collusion, and cartels.

Price Leaders Market Leader starts a round of price increases or cuts. Other firms must go along with the leader. If not a price war happens-competitors cut their prices very low to win business. Harmful to producers but good for consumers.

Collusion an agreement among members of an oligopoly to illegally set prices and production levels. Price Fixing- an agreement among firms to sell at the same or very similar prices.  Illegal in the United States but often seen. Collusion is not the only reason for nearly identical pricing in oligopolistic industries. Such pricing may actually result from intense competition, especially if advertising is vigorous and new lines of products are being introduced.

Cartels an agreement by a formal organization of producers to coordinate prices and production. Cartels can survive only if every member keeps to its agreed-upon output levels.   Can also collapse if some producers are left out of the group and decide to lower their prices below the cartel’s levels.

Quiz: Characteristics of Monopolistic Competition A monopolistically competitive firm has some control over price because A. its output is large enough to affect the demand. B. it can work with a rival firm to set prices in the market. C. there are many competing firms. D. it can differentiate its goods from other products.

Quiz: Non-price Competition A hotel that offers a complimentary fruit basket and a concierge who will help you plan your activities is an example of what kind of non-price competition? A. advertising, image, or status B. service level C. location D. physical characteristics

Quiz: Prices, Output, and Profits Why can’t a monopolistically competitive firm raise prices as high as a true monopoly can? A. because, like a monopoly, their output is extremely limited B. because new firms will enter the market with identical products C. because monopolistically competitive firms already earn profits well above their costs D. because competition would ensure that customers buy a rival firm’s cheaper product

Quiz: Characteristics of Oligopoly Why is a price war harmful to producers? A. If prices go too high, then the producers will have too many competitors. B. If prices go too low, then the producers won’t be able to make a profit. C. If there is a price war, then there can no longer be a price leader. D. If prices go too high, then the producers will have too few competitors.

[ 4.4 ] Government Regulation and Competition

Government and Competition Market Power-ability of a firm to control prices and total market output.  Antitrust Laws-If a firm controls a large share of a market, the Federal Trade Commission and the Department of Justice’s Antitrust Division will watch the firm closely to ensure that it does not unfairly force out its competitors. 1890 Sherman Antitrust Act- Outlawed mergers and monopolies that limit trade between states. Regulating Business Practices-The government has the power to regulate companies with few competitors. Splitting Up Monopolies-The government will force companies to split into competition firms. Ie. Phone company Assessing Mergers-A merger occurs when a company joins with another company or companies to form a single firm. The government has the ability to block mergers that might reduce competition and lead to higher prices.

Government and Competition Monopolies such as cable TV companies have a lot of market power. This photo shows an ad protesting a time when Time Warner (TW) cable company blocked a major network from its customers.

Government and Competition The Sherman Antitrust Act formed the basis for later federal policies aimed at supporting economic competition. Analyze Information How did the Clayton Antitrust Act aid trust-busting?

Government and Competition In 1984, AT&T was broken into seven companies that provided local telephone service. Analyze Maps What effect do you think this breakup had on the prices of phone service?

Deregulation In the late 1970s and 1980s, Congress decided that some government regulation was reducing competition. It passed laws to deregulate several industries. Deregulation means that the government no longer decides what role each company can play in a market and how much it can charge its customers.

Deregulation Judging Deregulation Airline Deregulation: Mixed Results

Deregulation Supporters of regulation and of deregulation both argue that the result is more competition. Analyze Information Choose one entry from each column and explain how it boosts competition.

Deregulation Deregulation of the trucking industry lowered barriers to entry. That led to the founding of many new small businesses, in which independent truckers owned and operated their own trucks.

Deregulation The average cost of flying generally decreased after the Airline Deregulation Act took effect. Analyze Graphs Why did airline deregulation lead to lower prices for consumers?

Quiz: Government and Competition The government would likely block a merger if the merger would A. bring two large companies together. B. lead to unfair market control. C. decrease prices too much. D. generate greater efficiencies.

Quiz: Deregulation Which of the following effects of an industry’s deregulation would show that it had failed to achieve its objective? A. Several large companies have gone bankrupt. B. Several large companies have merged. C. The industry has expanded wildly. D. Market prices have risen significantly.