Monopolistic Competition and Oligopoly

Chapter 11

Introduction

• Market structure is the focus real-world competition.

• Market structure refers to the physical characteristics of the market within which firms interact.

• How do firms and people buy and sell?

Introduction

• Market structure involves the number of firms in the market and the barriers to entry.

Introduction

• Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites.

• Monopolistic competition lie between these two extremes.

• Keiretsu – business network

Introduction

• Monopolistic competition is a market structure in which there are many firms selling differentiated products.

• There are few barriers to entry.

11.1 Characteristics of Monopolistic Competition

Four distinguishing characteristics:

3. Independence because of so many firms, each one acts independently. No firm takes into account the actions of other firms.

2. Lack of Collusion with so many firms it’s hard to get together and collude

1. Many sellers that do not take into account rivals’ reactions – each firm has a small share of the market

Product Differentiation

• Product differentiation implies that the products are different enough that the producing firms exercise a “mini-monopoly” over their product.

• The firms compete more on product differentiation than on price.

• Entering firms produce close substitutes, not an identical or standardized product.

P

MC

Q

Single Monoply Firm

Short Run and Long Run in Monopolistic Competition

MRD,P

QM

Pm

A

MCM

P

ATC

Q

MR D = P

QM

AMC

ATC

P = ATC

Profit

Single Monopolistically Competitive Firm

11.2 Short-Run, Output, Price, and Profit of a Monopolistic Competitor

• Like a monopoly,

• At profit maximizing output, marginal cost will be less than price

• Marginal revenue is below price

• Like a perfect competitor, zero economic profits exist in the long run

• The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve

A Monopolistically Competitive Firm: Above Normal Profit

A Monopolistically Competitive Firm: Economic Loss

A Monopolistically Competitive Firm: Normal Profit

Entry and Normal Profit

Comparing Perfect and Monopolistic Competition

• Both the monopolistic competitor and the perfect competitor make zero economic profit in the long run.

11.3 Long-Run Equilibrium in Monopolistic Long Run

• It is possible for the monopolist to make economic profit in the long-run.

• No long-run economic profit is possible in monopolistic competition due to easy entry and differentiated products.

Perfect Competition and Monopolistic Competition Compared

Monopolistic Competition Compared with Perfect Competition Graph

Outcome: Monopolistic competition

output is lower and price is higher than perfect competition

• In monopolistic competition in the long run, P > ATCmin

• In perfect competition in the long run, P = ATCmin

Q

P

ATC

QMC

MC

DMC

MRMC

PMC

PPCDPC

QPC

Monopolistic Competition Compared with Perfect Competition Graph

Outcome: Monopolistic competition output is lower (excess

capacity) and price is higher than perfect competition

• In monopolistic competition in the long run, P > min ATC,

Q

P

ATC

QMC

MC

DMC

MRMC

PMC

PPCDPC

QPC