1. Managerial Economics Eighth Edition Truett + Truett
Chapter 9: Monopolistic Competition, Oligopoly, and Related Topics
John Wiley & Sons, Inc.
9/18/2018
Slides by Jim Witsmeer

2. Introduction Should a monopoly advertise?
Should a supplier in perfect competition advertise?
Does either firm have to compete for market share?
What is product differentiation is it real or perceived?
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3. Definitions
Oligopoly is a market with a few sellers of the same product actively competing for market share.
Monopolistic competition is a market with many firms selling similar products with some differentiation.
The difference relates to how much rivalry there is among firms.
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4. Topics of Discussion Monopolistic Competition Oligopoly Duopoly
Barriers to Entry
Price Rigidity Without Collusion
Price Leadership
Efficient firm
Dominant firm
Perfect Collusion: Cartels
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5. Market Share Curve
Market share curve (Ma) is firm’s demand curve when all firms change price. Di Ma
MRi
Equilibrium Point
Firms operate at intersection of its demand and market share curves.
In short run it may be possible for firm to move along Di, but eventually, similar conditions will result in similar prices for all firms.
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6. Monopolistic Competition in the Short Run
Firm’s Short-Run Equilibrium
SMC
Firm must adjust estimate of d so it intersects M where SMC=MR.
If where d intersects M, firm’s SMC is not equal to MR, firm will have to make further adjustments (re-estimate d or, perhaps, make some changes in product differentiation to move M). d M MR
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7. Monopolistic Competition in the Long Run
Long-Run Equilibrium of the Firm
Free entry assures the firm’s economic profit will only be normal over the long run.
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8. Duopoly: An Oligopoly with only two competitors
Several economic theories have attempted to define the optimum strategy in a duopolistic competition (price war).
Most scenarios in the long-run result in both competitors losing and one or both going out of business.
In this situation a strategy of collusion or cooperative pricing for mutual benefit is optimal.
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9. Barriers to Market Entry
Entry-limit pricing
Excess capacity and economies of scale
Capital requirements
Product differentiation or brand recognition
Criminal intimidation
Government controls
Sales and distribution networks
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10. Price Rigidity Without Collusion
The kinked demand curve occurs when the competing firms follow a price decrease but not an increase.
The kink is the equilibrium point.
Firms with differing costs (profits) will operate at the same quantity/price.
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11. Rising Prices with a kinked demand curve
If costs rise to the extent shown here (MC2), then the firm must raise price to P2
To maximize profits and wait for the rest of the firms to follow which will move the kink to F and rotate the demand and MR curves adjusting the maximum profit and increasing sales to F.
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12. Sample Problem Initial Equilibrium TR =QP=101000= $10,000
Maximum Profit
TR = QP = 11800 = $8,800
TC=1500+3 8002
T = $8,800-$5,500 = $3,300
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13. Tacit Collusion An informal type of coordination among firms.
Formal Collusive agreements are illegal, although U. S. firms have been permitted to agree on export pricing.
Firms may get away with informal collusion, but they could be prosecuted under antitrust laws.
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14. Price Leadership Efficient Firm
When the lead firm changes price others will follow shortly.
Firm b has maximum profit at Pb but must adjust to Pa to sustain market share.
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15. Price Leadership Dominant Firm
The dominant share of the market is so large that competitors must accept the set market price as in perfect competition.
Dominant Firm
Entire Market
Ss =  MCs
The demand curve for the dominant firm is obtained by subtracting the quantity supplied by small firms from the total market quantity demanded.
The dominant firm selects Pe, which is the MR curve for small firms, who supply QS’.
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16. Sample Problem
If small firm supply is: QS=0.9P+150 and market demand is: QM= P than demand for the dominant firm is QL = QM-QS or QL= P
Dominant Firm DL
MRL
MCL
Entire Market SS DM QL QS QM
We can find TR = Q*P and MR = dTR/dQ. The MC is estimated to be constant at $260 so that the maximum profit for the dominant firm at MC=MR is at the point indicated and divides the market into units for the dominant firm and 428 units for the small firms collectively.
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17. The Cartel: Perfect Collusion
To maximize profit, cartel managers must allocate production based on the rule of marginal cost, which dictates that MR = MCA = MCB = …= MCn for all participants. This is the ideal and is sometimes modified in the short run to maintain unity.
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18. Sample Problem
A three member cartel estimates the market demand function for its product to be Qc = 1660 – 200Pc. The three members have marginal cost functions as follows: MCi = Qi , MCs = Qs and MCu = Qu. The sum of these equals the marginal cost function: MCc = Qc. The cartel marginal revenue is: MRc = dTR/dQ = Q. Setting MR=MC and solving for Qc gives us a quantity of 5300 units and MR = 3.0. Substituting this value into the cartel demand equation yields a price of $5.65. This divides among the cartel by setting all of their marginal costs equal to 3.0 and solving for their respective quantity allocations.
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19. Cartel Problem (graphically)
MRu Pc
SMCu
SACu
UWAQ Dc
MRc
MCc
CARTEL
MRs
SMCs
SACs
SHERAN Pc Pc
MRi
SMCi
SACi
IRUN Pc Qc Qs
PROFIT
PROFIT Qu Qi
PROFIT
Allocations are made to the members in accordance with the rule of marginal cost. The lower cost producers receive the largest allocation and the largest profit.
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20. End of Chapter 9
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the United States copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for resale. The publisher assumes no responsibilities for errors, omissions, or damages, caused by the use of the information contained herein.
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