Monopolistic competition and oligopoly

Monopolistic competition Many firms compete in open market Products are similar but not identical Low barriers to entry Some control over prices

Monopolistic competition is like a modified type of perfect competition with differences in products

Product differentiation is the key difference

Firms under monopolistic competition try not to compete on price alone- nonprice compeititon Different physical characteristics- size, shape, color, texture, taste Location or availability Service level Advertising, image, status

Oligopoly Market dominated by a few large, profitable firms- 4 largest firms produce at least 70-80% of output Some variety of products High barriers to entry Have some control over prices

Oligopolies exist Usually because of significant barriers to entry (auto industry or steel industry) Economies of scale

Oligopolistic firms can illegally work together to set prices and bar competing firms from entering the market Price leadership- price increases and cuts followed by others Collusion- agreement to set prices and production levels (price fixing) Cartels-agreement by a formal organization of producers to set prices and production

OPEC

Regulation and Deregulation Markets dominated by one or a few large firms tend to have higher prices and lower output than competitive markets Mergers and cartels can lead to anticompetitive behavior Predatory pricing-setting market prices below costs for the short term to drive competitors out of business

Predatory pricing

Antitrust legislation Trust- illegal grouping of companies that discourage competition Sherman Antitrust Act- outlaws mergers and monopolies that limit trade Clayton Antitrust Act- outlaws practices that limit competition or lead to monopoly

Regulating anticompetitive business practices

Breaking up monopolies

Blocking mergers

Deregulation

Analysis of deregulation Has led to lower prices and less red tape Safety issues and business practices may be questionable Many mergers have followed, leading to a less competitive environment