7-3: Monopolistic Competition and Oligopolies

Notes

Learning Target

• 1. I will demonstrate my understanding of the characteristics of monopolistically competitive firms and oligopolies.

Monopolistic Competition

• Monopolistic competition: when many sellers offer similar, but not standardized products

• Example: Think of the market for t-shirts (they come in all styles and brands)

Characteristics of Monopolistic Competition

• 1. Many producers/sellers: meaningful competition exists

• Example: there are many restaurants where you can buy a hamburger (Chili’s, McDonalds, Applebee's, TGI Friday's, Burger King, etc.)

Characteristics of Monopolistic Competition

• 2. Differentiated products: firms seek to distinguish their goods and services from those of other firms, even when the goods are close substitutes

• Example: “Toothpaste that will leave your breath fresher”

Characteristics of Monopolistic Competition

• 3. Few barriers to entry: start-up costs are relatively low and this allows many firms to enter the market

• Example: multiple t-shirt companies enter the market

Characteristics of Monopolistic Competition

• 4. Some control over prices: firms have to be careful not to raise prices too high otherwise consumers might substitute other goods

• Example: Coke raises its price and consumers start buying Pepsi

Characteristics of Monopolistic Competition

• Monopolistic competitive firms use nonprice competition to compete with rival firms

• Nonprice competition is using product differentiation and advertising to attract customers

Characteristics of Monopolistic Competition

• This can be done in several ways:

• A firm may seek to distinguish their particular brand based on unique characteristics (color, design, look, smell, touch)

• A producer might emphasize their service as a way of charging a higher price

Characteristics of Monopolistic Competition

• A firm might have a convenient location that is attractive to customers

• A firm might point to its image/status to attract customers

• Goods are “all natural” or item is more fashionable

Oligopolies

• Oligopoly: market structure in which only a few sellers offer a similar product

• Generally a result of economies of scale (costs decrease as more goods are produced)

• Competition does exist

Characteristics of Oligopolies

• 1. Few producers: a small number of firms control the market

• An industry is considered an oligopoly if the 4 top producers together supply more than 60% of total output

Characteristics of Oligopolies

• 2. Similar products: goods are generally the same, with minor variations

• Examples: cereal, light bulbs, kitchen appliances, and soft drinks

• May also sell standardized products (such as steel)

Characteristics of Oligopolies

• 3. High barriers to entry: it is difficult for firms to break in the market and compete

• Existing companies may take advantage of economies of scale and it would be expensive for a microchip company to compete with a large firm

Oligopolies Acting As Monopolies

• In some cases, oligopolies actual behave like monopolies

• Firms might try to control prices and other, smaller firms, may follow suit

• Firms might try to control the market through collusion, or making pricing agreements

• This is illegal

Oligopolies Acting As Monopolies

• A cartel is an organization of producers established to set production and price levels for a product

• OPEC is a well-known cartel that consists of 12 countries that agree to set quotas on oilproduction and exports

• This is an example of the potentially harmful effects of an oligopoly

7-4: Regulation and Deregulation Today

NOTES

Promoting Competition

• Regulation: set of rules or laws designed to control business behavior to promote competition and protect consumers

Antitrust Legislation

• Antitrust legislation: laws that define monopolies and give government the power to control them and break them up

Trust

• Trust: when a group of firms are combined to reduce competition in an industry

• Example: Standard Oil Company (controlled 90% of the market)

Merger

• Merger: when 2 firms join together to become 1

• If a merger will eliminate competition it will be denied by the government

Enforcing Antitrust Legislation

• The FTC and the Department of Justice are responsible for enforcing antitrust laws

• Mergers that allow companies to dominate a particular industry are not permitted

• The goal is not to allow companies to reduce competition

• What would happen if the two largest cell phone companies tried to merge?

Unfair Business Practices

• Price fixing: when businesses work together to set prices of competing products

• Market allocation: when competing businesses negotiate to divide up a market (could be by region)

• Predatory pricing: setting low prices to drive small producers of the same good out of business

Deregulation

• Deregulation: reducing or removing government control of a business

• Results in lower prices for consumers and more competition

• Example: airline industry was deregulated in 1978