Chapter 14: Monopolistic Competition and Oligopoly

Monopolistic competition

Industry Characteristics

Product Differentiation and Advertising

Product Differentiation and Advertising (cont.)

The Case for Product Differentiation and Advertising Τhe Case Against Product Differentiation and Advertising No right answer: You will see over and over as you study economics that many questions have no right answers. There are strong arguments on both sides of the advertising debate, and even the empirical evidence yields to conflicting conclusions.

Price and Output Discrimination in Monopolistic Competition

Price and Output Discrimination in Monopolistic Competition (cont.)

Oligopoly Is a form of industry (market) structure characterized by a few dominant firms that are large enough to influence the market price. The behaviour of any one firm in an oligopoly depends to a great extent on the behaviour of others. Products may be homogenous or differentiated. The classic example is the automobile industry. Market Structure in an Oligopoly Concentration ratio The share of industry output in sales or employment accounted for by the top firms. Oligopolies are concentrated industries.

Market Structure in an Oligopoly

Oligopoly Models The Collusion Model Cartel A group of firms that gets together and makes joint price and output decisions to maximize joint profits. (i.e. OPEC) Tacit collusion occurs when price- and quantity-fixing agreements among producers are explicit. Tacit collusion occurs when firms end up fixing price without a specific agreement, or when such agreements are implicit. The Price-Leadership Model Price leadership A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.

Oligopoly and Economic Performance Oligopolistic industries are likely to be inefficient for several reasons. First, profit-maximizing oligopolists are likely to price above MC. When price is above MC, there is underproduction from society’s point of view. Second, strategic behaviour can lead to outcomes that are not in society’s best interest. Specifically, strategically competitive firms can force themselves into deadlocks that waste resources. Finally, to the extent that oligopolies differentiate their products and advertise, there is the promise of new and exciting products. At the same time, however, there remains a real danger of waste and inefficiency.

The Role of Government

The Role of Government (cont.)

Over the last century, most governments have taken steps to curb the most extreme forms of imperfect competition. Government sometimes regulate the price and profits of monopolies such as local water, telephone, and electric utilities. In addition, government antitrust laws prohibit actions such as price fixing and agreeing to divide up markets. The most important check to imperfect competition is the opening of markets to competitors, whether they are domestic or foreign. Few monopolies can long withstand the attack of competitors unless governments protect them through tariffs or regulations.