Ch13 Monopolistic Competition and Oligopoly

7/25/2019 Ch13 Monopolistic Competition and Oligopoly

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2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air

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Prepared by: FernandoPrepared by: Fernando

Quijano and Yvonn QuijanoQuijano and Yvonn Quijano

Monopolistic Competition andMonopolistic Competition and

OligopolyOligopoly


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$onopolistic Competition$onopolistic Competition

% && monopolistically competitivemonopolistically competitive

industryindustryhas the follo'inghas the follo'ing

characteristics(characteristics(

% & large number of firms& large number of firms

% )o barriers to entr)o barriers to entr

% Pro*uct *ifferentiationPro*uct *ifferentiation


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$onopolistic Competition$onopolistic Competition

% Monopolistic competitionMonopolistic competitionis a commonis a common

form of in*ustr +maret- structure in theform of in*ustr +maret- structure in the

.nite* tates, characterie* b a large.nite* tates, characterie* b a large

number of firms, none of 'hich can influencenumber of firms, none of 'hich can influencemaret price b 1irtue of sie alonemaret price b 1irtue of sie alone

% ome *egree of maret po'er is achie1e*ome *egree of maret po'er is achie1e*

b firms pro*ucing *ifferentiate* pro*uctsb firms pro*ucing *ifferentiate* pro*ucts

% )e' firms can enter an* establishe* firms)e' firms can enter an* establishe* firms

can e3it such an in*ustr 'ith easecan e3it such an in*ustr 'ith ease


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4he Case for Pro*uct 5ifferentiation4he Case for Pro*uct 5ifferentiation

an* &*1ertisingan* &*1ertising

% 4he a*1ocates of free an* open4he a*1ocates of free an* open

competition belie1e that *ifferentiate*competition belie1e that *ifferentiate*

pro*ucts an* a*1ertising gi1e thepro*ucts an* a*1ertising gi1e the

maret sstem its 1italit an* are themaret sstem its 1italit an* are thebasis of its po'erbasis of its po'er

% Pro*uct *ifferentiation helps to ensurePro*uct *ifferentiation helps to ensure

high ualit an* efficient pro*uctionhigh ualit an* efficient pro*uction


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4he Case for Pro*uct 5ifferentiation4he Case for Pro*uct 5ifferentiation

an* &*1ertisingan* &*1ertising

% &*1ertising pro1i*es consumers 'ith&*1ertising pro1i*es consumers 'ith

the 1aluable information on pro*uctthe 1aluable information on pro*uct

a1ailabilit, ualit, an* price thata1ailabilit, ualit, an* price thatthe nee* to mae efficient choicesthe nee* to mae efficient choices

in the maret placein the maret place


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4he Case &gainst Pro*uct4he Case &gainst Pro*uct

5ifferentiation an* &*1ertising5ifferentiation an* &*1ertising

% Critics of pro*uct *ifferentiation an*Critics of pro*uct *ifferentiation an*

a*1ertising argue that the amount toa*1ertising argue that the amount to

nothing more than 'aste an*nothing more than 'aste an*

inefficiencinefficienc

% Enormous sums are spent to createEnormous sums are spent to create

minute, meaningless, an* possiblminute, meaningless, an* possibl

none3istent *ifferences amongnone3istent *ifferences amongpro*uctspro*ucts


7/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air

4he Case &gainst Pro*uct4he Case &gainst Pro*uct

5ifferentiation an* &*1ertising5ifferentiation an* &*1ertising

% &*1ertising raises the cost of pro*ucts&*1ertising raises the cost of pro*ucts

an* freuentl contains 1er littlean* freuentl contains 1er little

information 7ften, it is merel aninformation 7ften, it is merel an

annoanceannoance

% People e3ist to satisf the nee*s of thePeople e3ist to satisf the nee*s of the

econom, not 1ice 1ersaeconom, not 1ice 1ersa

% &*1ertising can lea* to unpro*ucti1e&*1ertising can lea* to unpro*ucti1e

'arfare an* ma ser1e as a barrier to'arfare an* ma ser1e as a barrier to

entr, thus re*ucing real competitionentr, thus re*ucing real competition



7ligopol7ligopol

% &n&n oligopolyoligopolyis a form of in*ustris a form of in*ustr

+maret- structure characterie* b a+maret- structure characterie* b a

fe' *ominant firms Pro*ucts mafe' *ominant firms Pro*ucts ma

be homogeneous or *ifferentiate*be homogeneous or *ifferentiate*

% 4he beha1ior of an one firm in an4he beha1ior of an one firm in an

oligopol *epen*s to a great e3tentoligopol *epen*s to a great e3tent

on the beha1ior of otherson the beha1ior of others



7ligopol $o*els7ligopol $o*els

% &ll in*s of oligopol ha1e one&ll in*s of oligopol ha1e one

thing in common(thing in common(

% 4he beha1ior of an gi1en4he beha1ior of an gi1en

oligopolistic firm *epen*s on theoligopolistic firm *epen*s on the

beha1ior of the other firms in thebeha1ior of the other firms in the

in*ustr comprising the oligopolin*ustr comprising the oligopol



4he Collusion $o*el4he Collusion $o*el

% & group of firms that gets together& group of firms that gets togetheran* maes price an* outputan* maes price an* output*ecisions 8ointl is calle* a*ecisions 8ointl is calle* a cartelcartel

% Collusion occurs 'hen price9 an*Collusion occurs 'hen price9 an*uantit9fi3ing agreements areuantit9fi3ing agreements aree3plicite3plicit

% Tacit collusionTacit collusionoccurs 'hen firmsoccurs 'hen firmsen* up fi3ing price 'ithout a specificen* up fi3ing price 'ithout a specificagreement, or 'hen agreements areagreement, or 'hen agreements areimplicitimplicit


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4he Price9:ea*ership $o*el4he Price9:ea*ership $o*el

% &ssumptions of the price9lea*ership mo*el(&ssumptions of the price9lea*ership mo*el(

"" 4he in*ustr is ma*e up of one large firm an* a4he in*ustr is ma*e up of one large firm an* a

number of smaller, competiti1e firms;number of smaller, competiti1e firms;

22 4he *ominant firm ma3imies profit sub8ect to4he *ominant firm ma3imies profit sub8ect to

the constraint of maret *eman*the constraint of maret *eman* andandsub8ect tosub8ect to

the beha1ior of the smaller firms;the beha1ior of the smaller firms;

## 4he *ominant firm allo's the smaller firms to4he *ominant firm allo's the smaller firms tosell all the 'ant at the price the lea*er has setsell all the 'ant at the price the lea*er has set



4he Price9:ea*ership $o*el4he Price9:ea*ership $o*el

% 7utcome of the price9lea*ership mo*el(7utcome of the price9lea*ership mo*el(

"" 4he uantit *eman*e* in the in*ustr is split4he uantit *eman*e* in the in*ustr is split

bet'een the *ominant firm an* the group ofbet'een the *ominant firm an* the group of

smaller firmssmaller firms

22 4his *i1ision of output is *etermine* b the4his *i1ision of output is *etermine* b the

amount of maret po'er that the *ominant firmamount of maret po'er that the *ominant firm

hashas

## 4he *ominant firm has an incenti1e to push4he *ominant firm has an incenti1e to push

smaller firms out of the in*ustr in or*er tosmaller firms out of the in*ustr in or*er to

establish a monopolestablish a monopol



Pre*ator PricingPre*ator Pricing

% 4he practice of a large, po'erful firm4he practice of a large, po'erful firm

*ri1ing smaller firms out of the*ri1ing smaller firms out of the

maret b temporaril selling at anmaret b temporaril selling at an

artificiall lo' price is calle*artificiall lo' price is calle*predatory pricingpredatory pricing

% uch beha1ior became illegal in theuch beha1ior became illegal in the

.nite* tates 'ith the passage of.nite* tates 'ith the passage ofantimonopol legislation aroun* theantimonopol legislation aroun* the

turn of the centurturn of the centur



Contestable $aretsContestable $arets

% & maret is& maret isperfectly contestableperfectly contestableifif

entr to itentr to it andande3it from it aree3it from it are

costlesscostless

% =n contestable marets, e1en large=n contestable marets, e1en large

oligopolistic firms en* up beha1ingoligopolistic firms en* up beha1ing

lie perfectl competiti1e firmslie perfectl competiti1e firms

Prices are pushe* to long9runPrices are pushe* to long9runa1erage cost b competition, an*a1erage cost b competition, an*

positi1e profits *o not persistpositi1e profits *o not persist



7ligopol is Consistent 'ith7ligopol is Consistent 'ith

a >ariet of Beha1iorsa >ariet of Beha1iors

% 4he onl necessar con*ition of oligopol is4he onl necessar con*ition of oligopol is

that firms are large enough to ha1e somethat firms are large enough to ha1e some

control o1er pricecontrol o1er price

% 7ligopolies are concentrate* in*ustries &t7ligopolies are concentrate* in*ustries &t

one e3treme is the cartel, in essence,one e3treme is the cartel, in essence,

acting as a monopolist &t the otheracting as a monopolist &t the other

e3treme, firms compete for smalle3treme, firms compete for small

contestable marets in response tocontestable marets in response toobser1e* profits =n bet'een are a numberobser1e* profits =n bet'een are a number

of alternati1e mo*els, all of 'hich stressof alternati1e mo*els, all of 'hich stress

the inter*epen*ence of oligopolistic firmsthe inter*epen*ence of oligopolistic firms


18/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics 6/ePrinciples of Economics 6/e Karl Case Ra !airKarl Case Ra !air

7ligopol an* Economic Performance7ligopol an* Economic Performance

% 7ligopolies, or concentrate* in*ustries, are7ligopolies, or concentrate* in*ustries, are

liel to be inefficient for the follo'ing reasons(liel to be inefficient for the follo'ing reasons(

% 4he are liel to price abo1e marginal cost 4his4he are liel to price abo1e marginal cost 4hismeans that there 'oul* be un*erpro*uction frommeans that there 'oul* be un*erpro*uction from

societ?s point of 1ie'societ?s point of 1ie'

% trategic beha1ior can force firms into *ea*locstrategic beha1ior can force firms into *ea*locs

that 'aste resourcesthat 'aste resources

% Pro*uct *ifferentiation an* a*1ertising ma pose aPro*uct *ifferentiation an* a*1ertising ma pose a

real *anger of 'aste an* inefficiencreal *anger of 'aste an* inefficienc

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Ch13 Monopolistic Competition and Oligopoly