Monopolistic Monopolistic Competition & Competition & Oligopoly Oligopoly
Monopolistic Monopolistic Competition & Competition & OligopolyOligopoly
OutlineOutline
I. Introduction
A. Where Does Monopolistic Competition “fit in”?
B. Assumptions of Monopolistic Competition
II. Monopolistic Competition
A. Short Run
B. Long Run
Outline (Cont.)Outline (Cont.)
III. Long Run Conditions
A. Excess Capacity
B. Product Differentiation
C. Allocative and Productive Efficiency
IV. Oligopoly
A. Where Oligopoly “fits in”
B. Assumptions
C. Concentration Ratios
Outline (Cont.)Outline (Cont.)
V. Models of Oligopoly
A. Cartel Theory
B. Game Theory
Where Does Monopolistic Where Does Monopolistic Competition “fit in?”Competition “fit in?”
Perfect Competition Monopoly
Where Does Monopolistic Where Does Monopolistic Competition “fit in?”Competition “fit in?”
Perfect Competition Monopoly
MonopolisticCompetition
Assumptions of Monopolistic Assumptions of Monopolistic CompetitionCompetition
• Many buyers and sellers (as opposed to monopoly)
• Firms produces a similar, yet unique product (gives us downward sloping demand)
• Ease of entry and exit
Examples of Monopolistically Examples of Monopolistically Competitive MarketsCompetitive Markets
• Pizza Places (Pizza Hut, Dominos)
• Hairdressers
• Grocery Stores (IGA, Kroger, Meijer)
Monopolistic Competition in the Monopolistic Competition in the Short RunShort Run
• Looks and Acts Like Monopoly• Faces Downward Sloping Demand and MR• Produces where MR=MC and may make a
profit.
Monopolistic Competition in the Monopolistic Competition in the Short RunShort Run
MCP
Q5
$10
D
0 1 2 3 4
24
6
8
MR
ATC
AVCatc*
p*
Monopolistic Competition in the Monopolistic Competition in the Long RunLong Run
• Firm Demand Shifts Back and Gets More Elastic.• Demand Shifts Back Because More Firms Enter
the Industry, So There is Less Demand Per Firm.
• Demand Gets More Elastic Because More Firms Means More Substitutes and More Substitutes Means More Elastic
Monopolistic Competition in the Monopolistic Competition in the Long RunLong Run
• Like Perfect Competition, Firms Will Continue to Enter Until There are No More Profits to Attract Them.
Monopolistic Competition in the Monopolistic Competition in the Long RunLong Run
MCP
Q5
$10
D
0 1 2 3 4
24
6
8
MR
ATC
AVCatc*p*=
Long Run Conditions of Long Run Conditions of Monopolistic CompetitionMonopolistic Competition
• Excess Capacity
• Product Differentiation
• Efficiency
Excess CapacityExcess Capacity
• Excess Capacity is the Difference Between The Long Run Perfectly Competitive Quantity Produced and the Long Run Monopolistically Competitive Quantity Produced.
• Generally Speaking, There Will be Excess Capacity in the Long Run of Monop. Competition.
Excess CapacityExcess Capacity
P
Q
D
0MR
MC
P*
ATCAVC
Q
Excess Capacity
Q
Product DifferentiationProduct Differentiation
• The More That a Firm Can Differentiate Their Product, The More Inelastic The Demand Becomes.
• Thus, Profits Can Be Sustained.
• This is the Role of Advertising.
EfficiencyEfficiency
• Productive Efficiency– Generally, A Monopolistically Competitive
Firm is not Productively Efficient, since it is not producing at the bottom of it’s ATC curve
• Allocative Efficiency– Generally, A Monopolistically Competitive
Firm is not Allocatively Efficient, since there is excess capacity.
OligopolyOligopoly
• For a Market to be Described as Oligopolistic, it must satisfy the following conditions:– Few Sellers, Many Buyers (more like
Monopoly).– The Firm’s products may be identical or unique– The are Barriers to Entry (like monopoly)
Where Does Oligopoly “fit in?”Where Does Oligopoly “fit in?”
Perfect Competition Monopoly
MonopolisticCompetition
Oligopoly
Concentration RatiosConcentration Ratios
• One Way to Determine Whether a Market is Oligopolistic is to look at a Concentration Ratio
• A Concentration Ratio Let’s Us Know if the Whole Industry’s Sales are Dominated by the Sales of a Few Firms.
• The X-Firm Concentration Ratio is the Percentage of Industry Sales Accounted for by the Sales of the Top X Firms in the Industry:
• Sales of the Top X Firms
Total Industry Sales
The X-Firm Concentration RatioThe X-Firm Concentration Ratio
Models of OligopolyModels of Oligopoly
• Cartel Theory: The Oligopolists Get Together (Since There are So Few of Them) and Act As If They Were One Monopolist and Collectively Produce the Monopolistic Quantity - Thus Maximizing Profit
• Example: OPEC
Problems With CartelsProblems With Cartels
• Generally, They Are Not Legal (Price Fixing)
• They Are Difficult to Organize and Monitor
• Can’t Force New Firms to Join
• Cheating
The Incentive to Cheat On A The Incentive to Cheat On A CartelCartel
• If the Cartel Maintains the Monopoly Price, The Individual Member of the Cartel Can Act Like a Price Taker (They Can Sell All They Want at the Market Price)
• As a Price Taker, They Maximize Profit Where MC=MR.
The Incentive to Cheat On A The Incentive to Cheat On A Cartel (Cont.)Cartel (Cont.)
• This Quantity is Greater Than the Cartel Wants the Individual Firm to Produce.
• All Firms in the Cartel Do This and the Cartel Falls Apart
Qcheater
The Incentive to Cheat On A The Incentive to Cheat On A CartelCartel
Firm
$ $
Q
DMR
MC
P
Q Q
MC ATC
MR
Market
Game TheoryGame Theory
• Game Theory is a Technique That Allows Us to Examine The Strategies of Oligopolists
• This Technique Allows Us to Determine the Best Strategy for a Oligopolist if the Other Oligopolists are Aware of the All of Avaliable Strategies
Example - The Prisoner’s Example - The Prisoner’s DilemmaDilemma
Consider the Following Story:
• Bill and Jill Have Cheated on an Exam
• They are Both Caught
• Bill in Prof. Platt’s Office and Jill is Prof. Lage’s Office
• Each Are Told That Their Punishment Will Be Somewhat Lighter if They Confess
Example - The Prisoner’s Example - The Prisoner’s Dilemma (Cont.)Dilemma (Cont.)
• They Both Know That if They BOTH Admit Nothing, it Will Be Tough to Prove That They Cheated
• They Can’t Communicate With Each Other
• What Do They Do?
Example - The Prisoner’s Example - The Prisoner’s DilemmaDilemma
Bill Confesses
Bill is Silent
Jill ConfessesJill is Silent
They Are Both Suspended For a Year, Fail the Class andTranscipts are Noted.
They Fail The Classand Their Transcriptis Noted
Jill Fails,Bill is Expelled
Bill Fails,Jill is Expelled
How Does The Prisoner’s How Does The Prisoner’s Dilemma Apply to Oligopoly?Dilemma Apply to Oligopoly?
• A Cartel Can only Hold Together if Everyone Sticks to Producing the Monopoly Quantity
• But a Cheater Benefits More Than the Others - Much Like Confession By Bill or Jill Alone, Benefits One More Than the Other.
• But if They All Know This -- They All Cheat and the Cartel Falls Apart.