KECSS Ms. Murren Economics10/31/11 Outcome: SWBAT compare oligopolies and monopolistic competition

Initial Activity Oligopolies Monopolistic Competition

Mini Lesson  What is an Oligopoly?  An oligopoly exists when an industry is dominated by a few suppliers that exercise some control over price Oligopolies are not as harmful as monopolies. The consumer may pay higher prices than in a perfectly competitive market but prices are stable and they offer a wider variety of products than a perfectly competitive market.

Mini Lesson Characteristics of an oligopoly  Domination by a few sellers  Barriers to entry  Identical or slightly different products  Non price competition  Interdependence  Several large firms are responsible for 70% - 80% of the market  Capital costs are high and it is difficult for new companies to enter major markets  Goods/Services provided by oligopolies are very similar  Advertising emphasizes minor differences and attempts to build customer loyalty (product differentiation)  Any change on the part of one firm will cause a reaction on the part of other firms in the oligopoly

Interdependence and Price Wars  With so few firms in an oligopoly, whatever one does the others are sure to follow. When one domestic airline cuts fares to gain market share the other major domestic airlines lowers theirs even more. Although this type of price war is initially good for consumers it may force an airline out of business if prices drop too much. Fewer airlines, means less competition which may raise prices in the long run

Cartel and Collusion  What is collusion?  When competing firms in an oligopoly secretly agree to raise prices or divide the market, they are performing an illegal act called collusion. Heavy penalties such as fines and imprisonment are levied against companies found guilty of collusion.  What is a cartel?  An arrangement groups of industrial businesses to reduce international competition by controlling price, production and distribution of goods.

Monopolistic Competition  What is monopolistic competition?  A market situation in which a large number sellers offer similar but slightly different products and in which each has some control over price

 Numerous Sellers  Relatively easy entry  Differentiated Products  Non-price Competition  Some control over price  No single seller or small group dominates the market  Entry into the market is easier than in a monopoly or oligopoly. One draw back is the high cost of advertising  Each supplier sells a slightly different product to attract customers  Businesses compete by using product to attract customers  By building a loyal customer base through product differentiation, each firm has some control over price changes Characteristics of Monopolistic Competition