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Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
23Monopolistic Competition and Oligopoly
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Key Terms
End Show
Chapter Objectives• Characteristics of Monopolistic
Competition• Why Monopolistic Competitors
Earn Only a Normal Profit in the Long-Run
• Characteristics of Oligopoly• How Game Theory Relates to
Oligopoly• Why the Demand Curve of the
Oligopolist May Be Kinked• Incentives and Obstacles to
Collusion Among Oligopolists• Potential Positive and Negative
Effects of Advertising
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Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
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Monopolistic Competition• Characteristics
–Small Market Shares–No Collusion–Independent Action
• Differentiated Products–Product Attributes–Service–Location–Brand Names and
Packaging–Some Control Over Price
O 23.1
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Key Terms
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Monopolistic Competition
• Easy Entry and Exit• Advertising
–Nonprice Competition
• Monopolistically Competitive Industries
O 23.1
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Key Terms
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Price and Output Determination
• The Firm’s Demand Curve
• The Short Run:–Profit or Loss
• The Long Run:–Only a Normal Profit–Profits: Firms Enter–Losses: Firm’s Leave
• Complications–Product Variety
In Monopolistic Competition
G 23.1
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Key Terms
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Price and Output DeterminationIn Monopolistic Competition
Short-Run Profits
Quantity
Pri
ce
an
d C
os
ts
MR = MC
MC
MR
D1
ATC
EconomicProfit
Q1
A1
P1
0
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Key Terms
End Show
Price and Output DeterminationIn Monopolistic Competition
Short-Run Losses
Quantity
Pri
ce
an
d C
os
ts
MR = MC
MC
MR
D2
ATC
Loss
Q2
A2
P2
0
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Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Price and Output DeterminationIn Monopolistic Competition
Long-Run Equilibrium
Quantity
Pri
ce
an
d C
os
ts
MR = MC
MC
MR
D3
ATC
Q3
P3=A3
0
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Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Quantity
Pri
ce
an
d C
os
ts
MR = MC
MC
MR
D3
ATC
Q3
P3=A3
0
Monopolistic Competition and Efficiency
Recall: P=MC=Minimum ATC
P4
Q4
Price is Higher
Excess Capacity atMinimum ATC
Monopolistic Competition is Not Efficient
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Key Terms
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Oligopoly• Characteristics
–A Few Large Producers–Homogeneous or
Differentiated Products• Homogeneous Oligopoly• Differentiated Oligopoly
–Control Over Price, But Mutual Interdependence• Strategic Behavior
–Entry Barriers–Mergers
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Key Terms
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Measures of Concentration
• Concentration Ratio• Localized Markets• Interindustry
Competition• World Trade
–Import Competition• Herfindahl Index(%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2
W 23.1
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Key Terms
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Game TheoryGame Theory Model to Analyze Behavior
RareAir’s Price Strategy
Up
tow
n’s
Pri
ce
Str
ate
gy A B
C D
$12
$12
$15
$6
$8
$8
$6
$15
High
High
Low
Low•2 Competitors•2 Price Strategies
•Each Strategy Has a Payoff Matrix
•Greatest CombinedProfit
• Independent ActionsStimulate a Response
O 23.2
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Key Terms
End Show
Game TheoryGame Theory Model to Analyze Behavior
RareAir’s Price Strategy
Up
tow
n’s
Pri
ce
Str
ate
gy A B
C D
$12
$12
$15
$6
$8
$8
$6
$15
High
High
Low
Low• Independently Lowered Prices in Expectation of Greater Profit Leads to the Worst Combined Outcome
•Eventually Low Outcomes Make Firms Return to Higher Prices
O 23.2
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Key Terms
End Show
Game Theory•Role of Mutual Interdependence
•Collusive Tendencies– Collusion
•Incentive to CheatG 23.2
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Key Terms
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Three Oligopoly Models
• Kinked Demand Curve• Collusive Pricing• Price Leadership• Diversity of
Oligopolies• Complications of
Interdependence
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Key Terms
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Kinked-Demand Curve
• Strategies–Match Price Changes–Ignore Price Changes
• A Combined Strategy• Price Inflexibility• The Kinked-Demand
CurveGraphically…
Noncollusive Oligopoly
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Pri
ce
Pri
ce a
nd
Co
sts
Quantity Quantity
0 0
Kinked-Demand CurveNoncollusive Oligopoly
P0
MR2
D2
D1
MR1
e
f
g
Rivals IgnorePrice Increase
Rivals MatchPrice Decrease
Q0
Competitor and Rivals Strategize Versus Each OtherConsumers Effectively Have 2 Partial Demand Curves
and Each Part Has Its Own Marginal Revenue Part
MR2
D2
D1
MR1Q0
MC1
MC2
P0
Resulting in a Kinked-Demand Curve to the Consumer – Price and Output
Are Optimized at the Kink
e
f
g
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Key Terms
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Kinked-Demand CurveNoncollusive Oligopoly• Criticisms of the Model
–Doesn’t Explain How Price Gets to the Kink (P0)
–Oligopoly Prices Are Not As Rigid During Instability as the Model Indicates
–Possibility of Price Wars
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Pri
ce a
nd
Co
sts
Quantity
Cartels and Other Collusion• Price and Output
–Collusion and Tendency Toward Joint-Profit Maximization
D
MR=MC
ATC
MC
MR
P0
A0
Q0
EconomicProfit
Effectively SharingThe Monopoly Profit
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Key Terms
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Cartels and Other Collusion• Overt Collusion
–Cartels–The OPEC Cartel
GLOBAL PERSPECTIVE
The 11 OPEC Nations Daily Oil Production, May 2006
Saudi ArabiaIranVenezuelaUAENigeriaKuwaitIraqLibyaIndonesiaAlgeriaQatar
Source: OPEC
Country Barrels of Oil9,099,0004,110,0003,233,0002,444,0002,306,0002,247,0001,903,0001,500,0001,451,000
894,000726,000
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Key Terms
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Cartels and Other Collusion• Covert Collusion
–Tacit Understandings• Obstacles to Collusion
–Demand and Cost Differences
–Number of Firms–Cheating–Recession–Potential Entry–Legal Obstacles:
• Antitrust Law
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Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
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Price Leadership Model• Leadership Tactics• Infrequent Price
Changes• Communications• Limit Pricing• Breakdowns in Price
Leadership:–Price Wars
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Key Terms
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Oligopoly and Advertising
• Advertising Prevalent in Monopolistic Competition and Oligopoly
• Positive Effects of Advertising
• Potential Negative Effects of Advertising
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Oligopoly and AdvertisingThe Largest U.S. Advertisers, 2005
CompanyAdvertising Spending
Millions of $
Proctor and GambleGeneral MotorsTime WarnerVerizonAT&TFord MotorWalt DisneyJohnson & JohnsonGlaxoSmithKlineDaimlerChrysler
$4609435334942484247123982279220921942179Source: Advertising Age
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Key Terms
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Oligopoly and AdvertisingWorld’s Top 10 Brand Names
GLOBAL PERSPECTIVE
Source: Interbrand
Coca-ColaMicrosoftIBMGeneral ElectricIntelNokiaToyotaDisneyMcDonaldsMercedes-Benz
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Oligopoly and Efficiency• Productive and Allocative
EfficiencyP = MC = Minimum ATC– Neither Exists
• Tendency to Share the Monopoly Profit
• Qualifications–Increased Foreign
Competition–Limit Pricing–Technological Advance
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Key Terms
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Oligopoly in the Beer Industry• Once Hundreds of Firms Now a
Very Small Group• Demand Side Changes
– Taste Shifts to Lighter Beers of Large Breweries
– Shift From Tavern-Tap Consumption to Can or Bottles
• Supply Side Changes– Technology Increased Minimum
Efficient Scale Creating a Barrier to Entry
– National Brands Enjoy Cost Advantages
• Consolidation of Firms into Oligopoly
Last
Word
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Key Terms
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Key Terms• monopolistic comp
etition• product differentiati
on• nonprice competitio
n• excess capacity• oligopoly• homogeneous oligo
poly• differentiated oligop
oly• strategic behavior• mutual
interdependence• concentration ratio
• interindustry competition
• import competition• Herfindahl index• game-theory model• collusion• kinked-demand
curve• price war• cartel• tacit
understandings• price leadership
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Key Terms
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Technology, R&D,And Efficiency