9. Monopolistic Competition & Oligopoly

Measuring market dominance 4-firm conentration ratio % sales from 4 largest firms > 40% then oligopoly < 40% then monopolistic comp.

Herfindahl-Hirschman Index (HHI) largest 50 firms sum square of % market share used by Justice Department if monopoly = (100)2 = 10,000

HHI (cont.) if < 1000 market is competitive if > 1800 market is uncompetitive

Oligopoly small number of firms interdependent behavior barriers to entry

examples Airlines Automobiles Cereal Soft Drinks

what types of barriers? economies of scale auto industry legal restrictions brand recognition cereal, soft drinks control over essential resource

Firm behavior no one model of behavior set of possible behaviors

Cartel firms collude to act like a single monopolist restrict output, charge higher price block entry

Price leadership informal collusion dominant firm sets price other firms follow to avoid a price war steel, airline, auto industries

cartels are tough to maintain each firm has output quota each firm tempted to cheat tough to block new entry

Collusion and Cartels firms may collude divide market fix prices illegal in U.S. examples OPEC ADM & others

Monopolistic Competition large # of firms product differentiation compete w/ quality, price, marketing no one firm dominates no collusion among firms free to enter/exit

examples running shoes fast food franchises clothing cleaning supplies beauty products

product differentiation physical differences color, size, taste ... location convenience, drug stores services delivery image high quality vs. value

Firm Behavior, short run Tommy Hilfiger Jeans demand curve downward sloping less elastic than perfect competition more elastic than a monopolist choose price & output like a monopolist

P, cost Q (jeans/day) MC D MR $70 150

($70-$20)(150) = $7500 economic profit P, cost MC ATC $70 $20 D MR Q (jeans/day) MC ATC D MR $70 150 $20

Long Run zero economic profit why? economic profit leads to entry economic loss leads to exit no entry/exit with zero economic profit

Excess capacity firms output is not at minimum of ATC output too small loss of economic welfare

Advertising & marketing firms in monopolistic competition spend more on this than perfect competition cost curves are higher is this a waste? Or do consumer benefit from greater selection?

Summary between perfect competition & monopoly monopolistic comp. chooses P & Q like a monopolistic oligopolist behavior interdependent importance of product differentiation importance of strategic behavior