1. Monopolistic Competition & Oligopoly
Chapter 12
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2. Monopolistic Competition
Relatively large # of sellers
Some control over price
Differentiated products often promoted by heavy advertising
Easy entry & exit into or out of industry
Monopolistic competition involves: small market shares, no collusion, & independent action (no feeling of interdependence)
Firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of locational convenience, or proclaim special qualities (real or imagined) for their products
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3. Differentiated Products
Variations of a particular product
Slightly different characteristics
Varying degrees of customer service
Locational convenience
Special qualities
Brand names and packaging
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4. Advertising
Firms in a monopolistically competitive industry advertise heavily.
Goal
Make price less of a factor in consumer purchases
Make product differences a greater factor.
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5. The Short Run Profit – Maximizing Point MR=MC
We’ve been through this before!!!
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6. The Long Run
Firms will enter a profitable monopolistically competitive (mc) industry and leave an unprofitable one.
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7. Productive Efficiency
The good is being produced in the least costly way.
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8. Allocative Efficiency
The right amount of output is being produced and the right amount of society’s scarce resources is being devoted to this specific use.
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9. Excess Capacity
The gap between the minimum ATC output and profit-maximizing output.
Plant and equipment are underused because firms are producing less than the minimum ATC output.
Add Figure 12.2 Page 233.
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10. Oligopoly
Market dominated by a few large producers of a standard or differentiated product.
Considerable control over prices
Need to consider the reaction of their rivals to their own pricing, output, & advertising decisions.
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11. Mutual interdependence
Each firm’s profit depends not only on its own price & sales strategies but also on those of its rivals.
Firms are “price makers” just like monopoly.
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12. Mergers
Some industries have developed into oligopolies through mergers.
By merging, two or more firms may increase their market share.
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13. Concentration Ratio
% of total output produced & sold by an industry’s largest firms.
When the largest four firms in an industry control 40% or more of the market, it is considered an oligopoly.
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14. Import competition
The concentration ratio does not account for import competition of foreign suppliers.
Many of the world’s largest corporations are foreign and do business in the U.S.
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15. Interindustry competition
Competition between two products associated with different industries.
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16. Game-Theory Model
The study of how people behave in strategic situations.
It’s important to study how your opponent runs their company.
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17. Pay-Off Matrix
Each firm (McDonald’s & Burger King) has two possible pricing strategies.
It also shows the profit that combination would earn for each firm.
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18. Collusion Cooperation with rivals.
In order for each firm to make higher profits, they could collaborate as opposed to establish prices competitively or independently.
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19. Price War
Successive and continuous rounds of price cuts by rivals as they attempt to maintain their market share.
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20. Price Leadership
Implied understanding where oligopolists can coordinate prices without engaging in outright collusion
A “dominant firm” initiates price changes and all other firms follow the leader.
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21. Cartel
Group of producers that typically creates a formal written agreement specifying how much each member will produce & charge.
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