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