Market Structures Monopolistic Competition and Oligopoly

Monopolistic Competition  Many companies compete in an open market to sell products that are similar but not identical.  Each firm holds a monopoly over its own particular product.  Modified version of perfect competition with minor differences in products

Monopolistic Competition  Goods are similar enough to be substituted for one another but they’re not identical.  Does not involve identical commodities  Examples:  Bagel shops, ice cream shops, gas stations, fast food restaurants

Four Conditions of Monopolistic Competition 1. Many firms 2. Few artificial barriers to entry into the market 3. Slight control over price 4. Differentiated products

Four Conditions of Monopolistic Competition  Differentiation enables a monopolistically competitive seller to profit from the differences between his or her products and competitors’ products.

Nonprice Competition  Competition through other ways other than lower prices. 1. Physical characteristics – a new size, color, shape, texture or taste 2. Location – “location, location, location” 3. Service level – fast food v. casual dining restaurants 4. Advertising, image, or status

Price, Output, and Profits  Prices are higher but not as high as in a true monopoly  Output and price are negatively related.  Falls somewhere between monopoly and perfect competition  Earn just enough profit to cover all of their costs.

Oligopoly  Describes a market dominated by a few large, profitable firms.  Looks like an imperfect form of monopoly  If the four largest firms produce 70 to 80 percent of the output.

Oligopoly Barriers to Entry  Government licenses or patents  High start-up costs  Economies of scale  Image and brand name

Oligopoly Many government regulations try to make oligopolistic firms act more like competitive firms.  Three practices that concern government: 1.Price leadership 2.Collusion 3.Cartels

Oligopoly  Price leaders can set prices and output for an entire industry (if others go along)  Collusion is an agreement among members of an oligopoly to set prices and output level – sets prices like a monopoly  A Cartel an agreement by a formal organization of producers to coordination prices and production. – illegal in the U.S.