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9. Monopolistic Competition & Oligopoly. Monopolistic Competition Oligopoly. Measuring market dominance. 4-firm conentration ratio % sales from 4 largest firms > 40% then oligopoly < 40% then monopolistic comp. Oligopoly. small number of firms interdependent behavior - PowerPoint PPT Presentation
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9. Monopolistic Competition9. Monopolistic Competition& Oligopoly& Oligopoly
• Monopolistic Competition• Oligopoly
Measuring market dominanceMeasuring market dominance
• 4-firm conentration ratio• % sales from 4 largest firms• > 40% then oligopoly• < 40% then monopolistic comp.
OligopolyOligopoly
• small number of firms• interdependent behavior• barriers to entry
examplesexamples
• Airlines• Automobiles• Cereal• Soft Drinks
what types of barriers?what types of barriers?
• economies of scale• auto industry
• legal restrictions• brand recognition• cereal, soft drinks
• control over essential resource
Firm behaviorFirm behavior
• no one model of behavior• set of possible behaviors
CartelCartel
• firms collude to act like a single monopolist• restrict output, charge higher price• block entry
Price leadershipPrice leadership
• informal collusion• dominant firm sets price• other firms follow to avoid a price
war• steel, airline, auto industries
• cartels are tough to maintain• each firm has output quota• each firm tempted to cheat• tough to block new entry
Collusion and CartelsCollusion and Cartels
• firms may collude• divide market• fix prices• illegal in U.S.
• examples• OPEC• ADM & others
Monopolistic CompetitionMonopolistic Competition
• large # of firms• product differentiation• compete w/ quality, price, marketing• no one firm dominates• no collusion among firms• free to enter/exit
examplesexamples
• running shoes• fast food franchises• clothing• cleaning supplies• beauty products
product differentiationproduct differentiation• physical differences• color, size, taste ...
• location• convenience, drug stores
• services• delivery
• image• high quality vs. value
Firm Behavior, short runFirm 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
P, cost
Q (jeans/day)
DMR
MC
150
$70
P, cost
Q (jeans/day)
DMR
MC
150
$70 ATC
$20
economic profit($70-$20)(150)= $7500
Long RunLong Run
• zero economic profit• why?• economic profit leads to entry• economic loss leads to exit• no entry/exit with zero economic
profit
Excess capacityExcess capacity
• firms output is not at minimum of ATC• output too small• loss of economic welfare
Advertising & marketingAdvertising & 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?
SummarySummary• between perfect competition &
monopoly• monopolistic comp. chooses P & Q
like a monopolistic• oligopolist behavior interdependent• importance of product differentiation• importance of strategic behavior