Monopolistic Comptt & Oligopoly Rk

8/22/2019 Monopolistic Comptt & Oligopoly Rk

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Monopolistic CompetitionMonopolistic competition is a marketstructure in which many firms selling a

differentiated product. Entry into and exitfrom the market is relatively easy.

Examples: Druggists stores, furniture, jewelry,

leather goods, grocery stores, Petrol pumps,restaurants, clothing stores and medical care.


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Characteristics of

Monopolistic CompetitionRelatively large number of sellers firms have

small market shares, collusion is unlikely andeach firm can act independently

Differentiated products the product is slightly

different and is often promoted by heavyadvertising

Selling Costs Cost incurred to enhance the salesof the commodity

Easy entry to, and exit from, the industry economies of scale are few, capital requirementsare low but financial barriers exist


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Differentiated ProductsProduct differentiation is a form of

nonprice competition in which a firm triesto distinguish its product or service from allcompeting ones on the basis of attributessuch as design and quality.

The firms compete more on productdifferentiation than on price

Production differentiation entails productattributes, service, location, brand nameand packaging, and some control over price.


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AdvertisingThe goal of product differentiation and

advertising is to make price less of a factor in

consumer purchases and make productdifferences a greater factor.

The intent is to increase the demand for a

product and to make demand less elastic.


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Pricing and Output in

Monopolistic CompetitionThe demand curve of a monopolistically

competitive firm is highly, but not perfectly,

elastic. The price elasticity of demand for a

monopolistic competitor depends on thenumber of rivals and the degree of product

differentiation. The larger the number of rival firms and theweaker the product differentiation, the greaterthe price elasticity of each firms demand.


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Output, Price, and Profit of a

Monopolistic CompetitorA monopolistically competitive firm prices in the same

manner as a monopolistwhereMC = MR.

But the monopolistic competitor is not only amonopolist but a competitor as well.


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The Short Run: Profit or LossThe monopolistically competitive firmmaximizes profit or minimizes loss in the

short run. It produces a quantityQ at whichMR = MC and charges a price Pbased on itsdemand curve.

When P > ATC, the firm earns an economicprofit.

When P < ATC, the firm incurs a loss.


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A Monopolistically Competitive Firm:

Above Normal Profit


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OligopolyOligopolyis a market structure dominatedby a few large producers of homogeneous or

differentiated products.Because of their fewness, oligopolists haveconsiderable control over their price.

Examples: tyres, beer, cigarettes, steel, copper,greeting cards, steel, aluminum, automobilesand breakfast cereals


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Characteristics of Oligopoly

A few large producers firms are generallylarge and together they dominate theindustry.

Either homogeneous or differentiated products the products are standardized, ordifferentiated with heaving advertising.

Price maker the firm can set its price andoutput levels to maximize its profit.


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Characteristics of OligopolyStrategic behaviorSelf-interested behavior

that takes into account the reactions of others.

Mutual interdependence each firms profit

depends not entirely on its own price andsales strategies but also on those of the otherfirms.

Blocked entry barriers to entry exist whichmake it hard for new firms to enter.


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Oligopoly and Advertising

Each firms share of the total market isgenerally determined through product

development and advertising for tworeasons: Product development and advertising

campaigns are less easily duplicated than price

cuts. Oligopolists have sufficient financial resources

to engage in product differentiation andadvertising.


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Oligopoly and Advertising

Positive effects of advertising are: Enhances competition

Reduces consumers search time, direct costs,and indirect costs

Facilitates the introduction of new products

Negative effects of advertising include:Alters consumers preferences in favor of the

advertisers product

Brand-loyalty promotes monopoly power


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Oligopoly and EfficiencyMany economists believe the oligopoly

market structure is neither productively

efficient nor allocatively efficient. This is because many oligopolistic firms price

higher than average total cost and produce lessthan the optimal output level.


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Oligopoly and EfficiencyA few believe that oligopoly is actually less

desirable than pure monopoly, because

government can guard against abuses ofmonopoly power but not against informalcollusion among oligopolists that give the

outward appearance of competitioninvolving independent firms.

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Monopolistic Comptt & Oligopoly Rk