Monopolistic Competition and Oligopoly Chapter 10

Monopolistic Competition: Characteristics Relatively Large Number of Sellers (dozens) Differentiated Products product attributes brand names some control of price Easy Entry and Exit Nonprice Competition and Advertising Example – Fast Food

Monopolistic Competition: Short Run The degree of elasticity for the monopolistically competitive firms demand curve depends on the number of rivals and the degree of differentiation (more rivals and less differentiation – highly elastic demand) Profit Max: MR=MC Graph

Long Run: Only a Normal Profit Economic Profits leads to the entry of new firms. As new firms enter the demand curve faced by a typical firm will shift to the left Long Run Equilibrium: ATC tangent to the demand curve Graph In the real world some monopolistically competitive firms earn economic profits

Monopolistic Competition: Efficiency Monopolistic Competition is not efficient P>MC P>min ATC

Oligopoly Oligopoly = a market dominated by a few large producers Homogeneous or Differentiated Products Homogeneous – steel, aluminum Differentiated – Autos, electronics Price Control, but mutual interdependence Barriers to Entry Mergers – lead to the creation of oligopolies (cell phone industry)

Measures of Industry Concentration Concentration Ratio – percentage of sales made by the largest four producers in an industry Complication: localized markets (groceries) Herfindahl Index – sum of the squared percentage of the market shares of all firms in an industry. Monopoly = 10,000

Oligopoly – Theory of Kinked Demand Given an existing market price, rivals will match price decreases (steep demand), but will ignore price increases (relatively flat demand) Results in a segmented marginal revenue curve and a stable price environment. Change in MC may not change output. Graph

Cartels and Collusion Collusion – when firms in an industry reach an agreement to fix prices, divide the market, or restrict competition Cartel – group of producers who develop a formal written agreement as to how much each member will produce. (OPEC) Through collusion and cartels groups of firms are able to act as monopolies