1. 9. Monopolistic Competition & Oligopoly

2. Measuring market dominance
4-firm conentration ratio
% sales from 4 largest firms
> 40% then oligopoly
< 40% then monopolistic comp.

3. Herfindahl-Hirschman Index (HHI)
largest 50 firms
sum square of % market share
used by Justice Department
if monopoly
= (100)2 = 10,000

4. HHI (cont.) if < 1000 market is competitive if > 1800
market is uncompetitive

6. Oligopoly small number of firms interdependent behavior
barriers to entry

7. examples
Airlines
Automobiles
Cereal
Soft Drinks

8. what types of barriers? economies of scale auto industry
legal restrictions
brand recognition
cereal, soft drinks
control over essential resource

9. Firm behavior
no one model of behavior
set of possible behaviors

10. Cartel firms collude to act like a single monopolist
restrict output, charge higher price
block entry

11. Price leadership informal collusion dominant firm sets price
other firms follow to avoid a price war
steel, airline, auto industries

12. cartels are tough to maintain
each firm has output quota
each firm tempted to cheat
tough to block new entry

13. Collusion and Cartels firms may collude divide market fix prices
illegal in U.S.
examples
OPEC
ADM & others

14. Monopolistic Competition
large # of firms
product differentiation
compete w/ quality, price, marketing
no one firm dominates
no collusion among firms
free to enter/exit

15. examples running shoes fast food franchises clothing cleaning supplies
beauty products

16. product differentiation
physical differences
color, size, taste ...
location
convenience, drug stores
services
delivery
image
high quality vs. value

17. Firm Behavior, short run
Tommy Hilfiger Jeans
demand curve downward sloping
less elastic than perfect competition
more elastic than a monopolist
choose price & output
like a monopolist

18. P, cost
Q (jeans/day) MC D MR
$70
150

19. ($70-$20)(150) = $7500 economic profit P, cost MC ATC $70 $20 D MR
Q (jeans/day) MC
ATC D MR
$70
150
$20

20. Long Run zero economic profit why? economic profit leads to entry
economic loss leads to exit
no entry/exit with zero economic profit

21. Excess capacity firms output is not at minimum of ATC output too small
loss of economic welfare

22. Advertising & marketing
firms in monopolistic competition spend more on this than perfect competition
cost curves are higher
is this a waste? Or
do consumer benefit from greater selection?

24. Summary between perfect competition & monopoly
monopolistic comp. chooses P & Q like a monopolistic
oligopolist behavior interdependent
importance of product differentiation
importance of strategic behavior