Copyright 2008 The McGraw-Hill Companies 23-1 Monopolistic Competition Monopolistic Competition and Efficie ncy Oligopoly Game Theory Three Oligop oly Models Kinked Deman d Curve Cartels and Other Collus ion Price Leader ship Model Oligopoly an d Efficiency Last Word Key Terms End Show 23 Monopolistic Competition and Oligopoly
Copyright 2008 The McGraw-Hill Companies 23-1 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models.
Mar 27, 2015
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Copyright 2008 The McGraw-Hill Companies23-1
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
Copyright 2008 The McGraw-Hill Companies23-2
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
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
Copyright 2008 The McGraw-Hill Companies23-3
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-4
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Monopolistic Competition
• Easy Entry and Exit• Advertising
–Nonprice Competition
• Monopolistically Competitive Industries
O 23.1
Copyright 2008 The McGraw-Hill Companies23-5
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 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
Copyright 2008 The McGraw-Hill Companies23-6
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
Short-Run Profits
Quantity
Pri
ce
an
d C
os
ts
MR = MC
MC
MR
D1
ATC
EconomicProfit
Q1
A1
P1
0
Copyright 2008 The McGraw-Hill Companies23-7
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
Short-Run Losses
Quantity
Pri
ce
an
d C
os
ts
MR = MC
MC
MR
D2
ATC
Loss
Q2
A2
P2
0
Copyright 2008 The McGraw-Hill Companies23-8
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
Copyright 2008 The McGraw-Hill Companies23-9
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
Copyright 2008 The McGraw-Hill Companies23-10
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-11
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-12
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
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•2 Competitors•2 Price Strategies
•Each Strategy Has a Payoff Matrix
•Greatest CombinedProfit
• Independent ActionsStimulate a Response
O 23.2
Copyright 2008 The McGraw-Hill Companies23-13
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
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
Copyright 2008 The McGraw-Hill Companies23-14
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Game Theory•Role of Mutual Interdependence
•Collusive Tendencies– Collusion
•Incentive to CheatG 23.2
Copyright 2008 The McGraw-Hill Companies23-15
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Three Oligopoly Models
• Kinked Demand Curve• Collusive Pricing• Price Leadership• Diversity of
Oligopolies• Complications of
Interdependence
Copyright 2008 The McGraw-Hill Companies23-16
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Kinked-Demand Curve
• Strategies–Match Price Changes–Ignore Price Changes
• A Combined Strategy• Price Inflexibility• The Kinked-Demand
CurveGraphically…
Noncollusive Oligopoly
Copyright 2008 The McGraw-Hill Companies23-17
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-18
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-19
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-20
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-21
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-22
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Price Leadership Model• Leadership Tactics• Infrequent Price
Changes• Communications• Limit Pricing• Breakdowns in Price
Leadership:–Price Wars
Copyright 2008 The McGraw-Hill Companies23-23
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Oligopoly and Advertising
• Advertising Prevalent in Monopolistic Competition and Oligopoly
• Positive Effects of Advertising
• Potential Negative Effects of Advertising
Copyright 2008 The McGraw-Hill Companies23-24
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Oligopoly and AdvertisingThe Largest U.S. Advertisers, 2005
CompanyAdvertising Spending
Millions of $
Proctor and GambleGeneral MotorsTime WarnerVerizonAT&TFord MotorWalt DisneyJohnson & JohnsonGlaxoSmithKlineDaimlerChrysler
$4609435334942484247123982279220921942179Source: Advertising Age
Copyright 2008 The McGraw-Hill Companies23-25
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
Oligopoly and AdvertisingWorld’s Top 10 Brand Names
GLOBAL PERSPECTIVE
Source: Interbrand
Coca-ColaMicrosoftIBMGeneral ElectricIntelNokiaToyotaDisneyMcDonaldsMercedes-Benz
Copyright 2008 The McGraw-Hill Companies23-26
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-27
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-28
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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
Copyright 2008 The McGraw-Hill Companies23-29
Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyGame TheoryThree Oligopoly ModelsKinked Demand CurveCartels and Other CollusionPrice Leadership ModelOligopoly and EfficiencyLast Word
Key Terms
End Show
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Technology, R&D,And Efficiency
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