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Zax zeeliin Shinj

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Jigjid Shirbazar
Jigjid Shirbazar

The document summarizes key concepts about imperfect competition, including monopolistic competition and oligopoly. It discusses: 1) the characteristics of monopolistic competition as many small differentiated firms that engage in non-price competition, 2) how monopolistically competitive firms are price makers that follow marginal revenue = marginal cost, and 3) how in the long run they earn only normal profits. It then covers: 4) the characteristics of oligopoly including few firms, mutual interdependence, and high barriers to entry, 5) how oligopolists may use price leadership or form cartels to influence prices.

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Lecture Outlines Monopolistic Competition and Oligopoly Reading: Chapter 10 of Tucker Overview: o The Monopolistic Competition Market Structure o The Monopolistically Competitive Firm as a Price Maker o Price and Output Decisions for a Monopolistically Competitive Firm o Comparing Monopolistic Competition and Perfect Competition o The Oligopoly Market Structure o Price and Output Decisions for an Oligopolist o Evaluation of Oligopoly o Review of Four Market Structures Imperfect Competition: A market structure between the extremes of perfect competition and monopoly. There are two types: monopolistic competition and oligopoly. The Monopolistic Competition Market Structure Monopolistic Competition: A market structure characterized by: 1. Many small sellers: Each firm is so small relative to the total market that each firm's pricing decisions have a negligible effect in the market price. 2. A differentiated product: Real or apparent differences between products. Close, but not perfect, substitutes exist. o Non-price Competition: The situation in which a firm competes using advertising, packaging, product development, better quality, and better service, rather than lower prices. o Advertising is a primary method used to distinguish product. 3. Easy market entry and exit: There are low barriers to entry, although market entry is not as easy as in a perfectly competitive market. The Monopolistically Competitive Firm as a Price Maker o Monopolistically competitive firms are price makers instead of price takers primarily because of product differentiation. o The demand curve is downward sloping. o The demand curve for a monopolistically competitive firm is less elastic (steeper) than for a perfectly competitive firm and more elastic (flatter) than for a monopolist. Price and Output Decisions for a Monopolistically Competitive Firm 1. Monopolistic Competition in the Short Run o In the short run, monopolistic competition resembles monopoly. o Short run profit is maximized by following the MR = MC rule. o If the price equals the ATC curve, the firm earns a short-run normal profit. 2. Monopolistic Competition in the Long Run o In the long run, the monopolistically competitive firm will not earn an economic profit -- only a normal profit (zero economic profit).
o Short run profits and easy market entry attract new firms to the industry. o Market share is taken away by new firms and advertising costs increase, resulting in long-run average cost increases. Comparing Monopolistic Competition and Perfect Competition 1. The Monopolistic Competitor as a Resource Misallocator o As with monopoly, the price charged by monopolistically competitive firms exceeds the marginal cost and so the value to the consumer is greater than the cost of producing it. o Less resources are used and output is restricted in order to maximize profit. 2. Monopolistic Competition Means Less Output at a Higher Cost o Monopolistically competitive firms do not produce at the lowest point on the Long Run Average Cost (LRAC) curve. o Too many firms are producing too little output at inflated prices and wasting society's resources. The Oligopoly Market Structure Oligopoly: A market structure characterized by: 1. Few sellers: A few firms are so large relative to the total market that they can affect the market price. o Mutual Interdependence: A condition in which an action by one firm may cause a reaction on the part of other firms. 2. Either a homogenous or a differentiated product: Buyers may or may not be indifferent as to which seller's product they buy. 3. Difficult market entry: Formidable barriers to entry. For example, exclusive financial requirements. Control over an essential resource, patent rights, and economies of scale. Price and Output Decisions for an Oligopolist 1. Nonprice Competition o Oligopolies often compete through nonprice methods such as advertising and product differentiation. o The reason is that changes in price would be easy for competitors to match, while it is more difficult to compete with clever or important product improvement. 2. The Kinked Demand Curve: A demand curve facing an oligopolist that assumes rivals will match a price decrease, but ignore a price increase. o Oligopolists are price makers. o Above the quot;kinkquot; in the demand curve, demand is relatively elastic (flat). An increase in price would not be copied by competitors, and consumers would shift to the cheaper product, causing a large decrease in QD from a given increase in price. o The segment of the demand curve below the quot;kinkquot; is relatively inelastic (steep). A decrease in price would be copied by competitors and each firm keeps its original market share, implying a small decrease in QD from a given decrease in price. o The price established at the quot;kinkquot; changes very infrequently. 3. Price Leadership: A pricing strategy in which a dominant firms sets the price for an industry and the other firms follow -- both for price increases and decreases.
o An informal process that assumes firms do not collude. 4. Cartel: A group of firms formally agreeing to control the price and output of a product. o Replaces competition with cooperation in order to reap monopoly profits. o Cartels are illegal in the US, but not in other countries (Ex. OPEC). o If one firm quot;cheatsquot; it increases output above the agreed level and increases profits. An Evaluation of Oligopoly o Prices charged for products will be higher than under perfect competition. o Spending money on nonprice competition can shift the demand curve to the right, causing price and output to be higher than under perfect competition. o In the long run, oligopolists can earn economic profit, while the perfectly competitive firm cannot. Review of the Four Market Structures Market Structure Number of Sellers Type of Product Entry Condition Examples Perfect Competition Large Homogenous Very Easy Agriculture Monopoly One Unique Impossible Public utilities Monopolistic Many Differentiated Easy Retail trade Competition Oligopoly Few Homogenous or Difficult Autos, steel, oil differentiated

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Zax zeeliin Shinj

  • 1. Lecture Outlines Monopolistic Competition and Oligopoly Reading: Chapter 10 of Tucker Overview: o The Monopolistic Competition Market Structure o The Monopolistically Competitive Firm as a Price Maker o Price and Output Decisions for a Monopolistically Competitive Firm o Comparing Monopolistic Competition and Perfect Competition o The Oligopoly Market Structure o Price and Output Decisions for an Oligopolist o Evaluation of Oligopoly o Review of Four Market Structures Imperfect Competition: A market structure between the extremes of perfect competition and monopoly. There are two types: monopolistic competition and oligopoly. The Monopolistic Competition Market Structure Monopolistic Competition: A market structure characterized by: 1. Many small sellers: Each firm is so small relative to the total market that each firm's pricing decisions have a negligible effect in the market price. 2. A differentiated product: Real or apparent differences between products. Close, but not perfect, substitutes exist. o Non-price Competition: The situation in which a firm competes using advertising, packaging, product development, better quality, and better service, rather than lower prices. o Advertising is a primary method used to distinguish product. 3. Easy market entry and exit: There are low barriers to entry, although market entry is not as easy as in a perfectly competitive market. The Monopolistically Competitive Firm as a Price Maker o Monopolistically competitive firms are price makers instead of price takers primarily because of product differentiation. o The demand curve is downward sloping. o The demand curve for a monopolistically competitive firm is less elastic (steeper) than for a perfectly competitive firm and more elastic (flatter) than for a monopolist. Price and Output Decisions for a Monopolistically Competitive Firm 1. Monopolistic Competition in the Short Run o In the short run, monopolistic competition resembles monopoly. o Short run profit is maximized by following the MR = MC rule. o If the price equals the ATC curve, the firm earns a short-run normal profit. 2. Monopolistic Competition in the Long Run o In the long run, the monopolistically competitive firm will not earn an economic profit -- only a normal profit (zero economic profit).
  • 2. o Short run profits and easy market entry attract new firms to the industry. o Market share is taken away by new firms and advertising costs increase, resulting in long-run average cost increases. Comparing Monopolistic Competition and Perfect Competition 1. The Monopolistic Competitor as a Resource Misallocator o As with monopoly, the price charged by monopolistically competitive firms exceeds the marginal cost and so the value to the consumer is greater than the cost of producing it. o Less resources are used and output is restricted in order to maximize profit. 2. Monopolistic Competition Means Less Output at a Higher Cost o Monopolistically competitive firms do not produce at the lowest point on the Long Run Average Cost (LRAC) curve. o Too many firms are producing too little output at inflated prices and wasting society's resources. The Oligopoly Market Structure Oligopoly: A market structure characterized by: 1. Few sellers: A few firms are so large relative to the total market that they can affect the market price. o Mutual Interdependence: A condition in which an action by one firm may cause a reaction on the part of other firms. 2. Either a homogenous or a differentiated product: Buyers may or may not be indifferent as to which seller's product they buy. 3. Difficult market entry: Formidable barriers to entry. For example, exclusive financial requirements. Control over an essential resource, patent rights, and economies of scale. Price and Output Decisions for an Oligopolist 1. Nonprice Competition o Oligopolies often compete through nonprice methods such as advertising and product differentiation. o The reason is that changes in price would be easy for competitors to match, while it is more difficult to compete with clever or important product improvement. 2. The Kinked Demand Curve: A demand curve facing an oligopolist that assumes rivals will match a price decrease, but ignore a price increase. o Oligopolists are price makers. o Above the quot;kinkquot; in the demand curve, demand is relatively elastic (flat). An increase in price would not be copied by competitors, and consumers would shift to the cheaper product, causing a large decrease in QD from a given increase in price. o The segment of the demand curve below the quot;kinkquot; is relatively inelastic (steep). A decrease in price would be copied by competitors and each firm keeps its original market share, implying a small decrease in QD from a given decrease in price. o The price established at the quot;kinkquot; changes very infrequently. 3. Price Leadership: A pricing strategy in which a dominant firms sets the price for an industry and the other firms follow -- both for price increases and decreases.
  • 3. o An informal process that assumes firms do not collude. 4. Cartel: A group of firms formally agreeing to control the price and output of a product. o Replaces competition with cooperation in order to reap monopoly profits. o Cartels are illegal in the US, but not in other countries (Ex. OPEC). o If one firm quot;cheatsquot; it increases output above the agreed level and increases profits. An Evaluation of Oligopoly o Prices charged for products will be higher than under perfect competition. o Spending money on nonprice competition can shift the demand curve to the right, causing price and output to be higher than under perfect competition. o In the long run, oligopolists can earn economic profit, while the perfectly competitive firm cannot. Review of the Four Market Structures Market Structure Number of Sellers Type of Product Entry Condition Examples Perfect Competition Large Homogenous Very Easy Agriculture Monopoly One Unique Impossible Public utilities Monopolistic Many Differentiated Easy Retail trade Competition Oligopoly Few Homogenous or Difficult Autos, steel, oil differentiated