12 - 1 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition.

12 - 1Copyright McGraw-Hill/Irwin, 2005

Monopolistic Competition

Characteristics

Price and Output in Monopolistic Competition

Monopolistic Competition and Efficiency

Oligopoly

Oligopolies and Mergers

Three Oligopoly Models

Kinked-Demand Theory

Cartels and Collusion

Price Leadership

Oligopoly and Efficiency

Key Terms

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and Oligopoly


and Oligopoly

SuperiorCheese12C H A P T E R



Characteristics



Oligopoly





Price Leadership


Key Terms

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Market Structure Continuum

PureCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET MODELSMonopolistic Competition:•Relatively Large Number of Sellers

•Differentiated Products•Easy Entry and Exit



Characteristics



Oligopoly





Price Leadership


Key Terms

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CHARACTERISTICS

Relatively Large Number of Sellers•Small Market Shares•No Collusion•Independent Action



Characteristics



Oligopoly





Price Leadership


Key Terms

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Differentiated Products• Product Attributes• Service• Location• Brand Names and

Packaging• Some Control Over

Price• Easy Entry and Exit• Advertising

CHARACTERISTICS



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

MR

P1

ATCP

rice

an

d C

ost

s

Q1

Short-RunEconomic

Profits

Expect New Competitors

PRICE AND OUTPUT INMONOPOLISTIC COMPETITION

Quantity

A1

MC



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

MR

P1

ATCP

rice

an

d C

ost

s

Q1

Expect New Competitors


Quantity

A1

New competition drives down theprice level – leading to economic

losses in the short run.

MC

Short-RunEconomic

Profits



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P2

ATCP

rice

an

d C

ost

s

Q2

Short-RunEconomic

Losses


Quantity

A2



Characteristics



Oligopoly





Price Leadership


Key Terms

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Short-RunEconomic

Losses

D

MR

MC

P2

ATCP

rice

an

d C

ost

s

Q2


Quantity

A2With economic losses, firms willexit the market – stability occurswhen economic profits are zero.



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P3 = A3

ATCP

rice

an

d C

ost

s

Q3


Quantity

Long-Run EquilibriumNormalProfitOnly



Characteristics



Oligopoly





Price Leadership


Key Terms

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MONOPOLISTIC COMPETITIONAND EFFICIENCY

• Not Productively Efficient

Minimum ATC

• Not Allocatively Efficient

Price MC

• Excess CapacityGraphically…



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P3 = A3

ATCP

rice

an

d C

ost

s

Q3

Quantity

Long-Run EquilibriumPrice is Not= Minimum

ATC

Price MC




Characteristics



Oligopoly





Price Leadership


Key Terms

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Product Variety• Benefits of Product

Variety• Nonprice Competition• Advertising Role• Trial & Error Search for

Maximum Profits



Characteristics



Oligopoly





Price Leadership


Key Terms

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PureCompetition

PureMonopoly

MonopolisticCompetition Oligopoly

FOUR MARKET MODELSOligopoly:•A Few Large Producers•Homogeneous or Differentiated Products

•Control Over Price, But Mutual Interdependence•Strategic Behavior

•Entry Barriers



Characteristics



Oligopoly





Price Leadership


Key Terms

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OLIGOPOLIES AND MERGERS

MergersMeasures of Industry Concentration

•Concentration Ratio•Localized Markets•Interindustry Competition•World Trade•Import Competition



Characteristics



Oligopoly





Price Leadership


Key Terms

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Herfindahl IndexSum of the squared percentage marketshares for all firms in the industry – Places greater weight upon the largerfirms(%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2

A greater Herfindahl Index indicates a greater concentration of market power in the industry.(Pure competition is near zero.)



Characteristics



Oligopoly





Price Leadership


Key Terms

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Mutual InterdependenceGame-Theory ModelCollusive Tendencies

•CollusionIncentive to CheatIntroduction to Game Theory…



Characteristics



Oligopoly





Price Leadership


Key Terms

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OLIGOPOLY BEHAVIORA Game-Theory Overview

High

Low

High LowU

pto

wn

’s P

rice

Str

ateg

yRareAir’s Price Strategy

BA

DC

$12 $15

$12 $6

$6 $8

$8$15



Characteristics



Oligopoly





Price Leadership


Key Terms

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High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

GreatestCombined

Profit



Characteristics



Oligopoly





Price Leadership


Key Terms

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High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

IndependentActions

StimulateResponse



Characteristics



Oligopoly





Price Leadership


Key Terms

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High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

IndependentActions

StimulateResponse

Gravitatingto the

Worst Case



Characteristics



Oligopoly





Price Leadership


Key Terms

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High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

CollusionInvites aDifferentSolution



Characteristics



Oligopoly





Price Leadership


Key Terms

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High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15




Characteristics



Oligopoly





Price Leadership


Key Terms

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High

Low

High LowU

pto

wn

’s P

rice

Str

ateg


BA

DC

$12 $15

$12 $6

$6 $8

$8$15

But, theincentiveto cheatis very

real




Characteristics



Oligopoly





Price Leadership


Key Terms

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No Standard Model due to...Diversity of OligopoliesComplications of Interdependence

1 – Kinked Demand Curve2 – Cartels and Collusion3 – Price Leadership

THREE OLIGOPOLY MODELS

Alternative Models:



Characteristics



Oligopoly





Price Leadership


Key Terms

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D1

MR1Quantity

The firm’s demand andmarginal revenue curves

KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY

Pri

ce



Characteristics



Oligopoly





Price Leadership


Key Terms

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MR2D1

D2

MR1Quantity

The rival’s demand andmarginal revenue curves


Pri

ce



Characteristics



Oligopoly





Price Leadership


Key Terms

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MR2D1

D2

MR1Quantity


Pri

ce

Rivals tend tofollow a price cut



Characteristics



Oligopoly





Price Leadership


Key Terms

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MR2D1

D2

MR1Quantity


Pri

ce

Rivals tend tofollow a price cut

or ignore aprice increase



Characteristics



Oligopoly





Price Leadership


Key Terms

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MR2D1

D2

MR1Quantity

Effectively creatinga kinked demand curve


Pri

ce



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

Quantity



Pri

ce



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

MR1Quantity



Pri

ce

MC2

MC1

MR2



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

Quantity

Profit maximizationMR = MC occurs

at the kink


Pri

ce

MC2

MC1

MR2

MR1



Characteristics



Oligopoly





Price Leadership


Key Terms

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D

Quantity

This behavior can setoff a price war.


Pri

ce

MC2

MC1

MR2

MR1



Characteristics



Oligopoly





Price Leadership


Key Terms

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If a few firms face identical or highly similar demand and costs...

Oligopoly is conducive to collusion.

they will tend to seek jointprofit maximization.

CARTELS AND OTHER COLLUSION

Graphically…



Characteristics



Oligopoly





Price Leadership


Key Terms

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Colluding Oligopolists WillSplit the Monopoly Profits

D

MC

ATC

MR

EconomicProfit

MR = MC

Pri

ce a

nd

co

sts

Q0

P0

A0




Characteristics



Oligopoly





Price Leadership


Key Terms

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Overt Collusion•Cartels Defined•The OPEC Cartel

Covert Collusion•Recent Examples•U.S. Illegality•Tacit Understandings




Characteristics



Oligopoly





Price Leadership


Key Terms

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Obstacles to Collusion•Demand and Cost Differences

•Number of Firms•Cheating•Recession•Potential Entry•Antitrust Law




Characteristics



Oligopoly





Price Leadership


Key Terms

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PRICE LEADERSHIP MODEL

Leadership Tactics•Infrequent Price Changes

•Communications•Limit Pricing

Breakdowns in Price Leadership-Price Wars



Characteristics



Oligopoly





Price Leadership


Key Terms

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OLIGOPOLY AND ADVERTISING

Less Easily DuplicatedAdequate ResourcesPositive Effects of

AdvertisingPotential Negative

Effects of AdvertisingBrand Development



Characteristics



Oligopoly





Price Leadership


Key Terms

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OLIGOPOLY AND EFFICIENCY

Productive EfficiencyP = Minimum ATC

Allocative EfficiencyP = MC

Oligopoly: No Productive Efficiency

Oligopoly: No Allocative Efficiency

Qualifications

monopolistic competitionproduct differentiationnonprice competitionexcess capacityoligopolyhomogeneous oligopolydifferentiated oligopolystrategic behaviormutual interdependenceconcentration ratio

interindustry competition

import competitionHerfindahl indexgame-theory modelcollusionkinked-demand

curveprice warcarteltacit understandingsprice leadership

ENDBACKCopyright McGraw-Hill/Irwin, 2005



Characteristics



Oligopoly





Price Leadership


Key Terms

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Next...

Chapter 13

Technology, R&D, and Efficiency

12 - 1 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition.

Documents

oligopoly models

slide end

exit slide

price level

economic losses price

economic profits slide

costs q2q2 price

costs q3q3 price