Bec doms ppt on monopolistic competition

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Monopolistic Competition& Oligopoly

Monopolistic Competition Oligopoly

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Measuring market dominance

4-firm conentration ratio % sales from 4 largest firms > 40% then oligopoly < 40% then monopolistic comp.

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Herfindahl-Hirschman Index (HHI)

largest 50 firms sum square of % market share used by Justice Department if monopoly

= (100)2 = 10,000

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HHI (cont.)

if < 1000 market is competitive

if > 1800 market is uncompetitive

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Oligopoly

small number of firms interdependent behavior barriers to entry

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examples

Airlines Automobiles Cereal Soft Drinks

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what types of barriers?

economies of scale auto industry

legal restrictions brand recognition

cereal, soft drinks

control over essential resource

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Firm behavior

no one model of behavior set of possible behaviors

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Cartel

firms collude to act like a single monopolist restrict output, charge higher price block entry

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Price leadership

informal collusion dominant firm sets price

other firms follow to avoid a price war steel, airline, auto industries

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cartels are tough to maintain each firm has output quota each firm tempted to cheat tough to block new entry

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Collusion and Cartels

firms may collude divide market fix prices illegal in U.S.

examples OPEC ADM & others

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Monopolistic Competition

large # of firms product differentiation compete w/ quality, price, marketing no one firm dominates no collusion among firms free to enter/exit

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examples

running shoes fast food franchises clothing cleaning supplies beauty products

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product differentiation

physical differences color, size, taste ...

location convenience, drug stores

services delivery

image high quality vs. value

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Firm 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

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P, cost

Q (jeans/day)

DMR

MC

150

$70

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P, cost

Q (jeans/day)

DMR

MC

150

$70 ATC

$20

economic profit($70-$20)(150)= $7500

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Long Run

zero economic profit why?

economic profit leads to entry economic loss leads to exit no entry/exit with zero economic profit

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Excess capacity

firms output is not at minimum of ATC output too small loss of economic welfare

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Advertising & 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?

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Summary

between perfect competition & monopoly monopolistic comp. chooses P & Q like a

monopolistic oligopolist behavior interdependent importance of product differentiation importance of strategic behavior