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C H A P T E R
C H A P T E R
C H A P T E R 13
Prepared by: Fernando QuijanoPrepared by: Fernando Quijanoand Yvonn Quijanoand Yvonn Quijano
• Monopolistic competition is a common form of industry (market) structure in the United States, characterized by a large number of firms, none of which can influence market price by virtue of size alone. Some degree of market power is achieved by firms producing differentiated products. New firms can enter and established firms can exit such an industry with ease.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
75221485Miscellaneous plastic productsSource: U.S. Department of Commerce, Bureau of the Census, 1997 Census of Manufacturers, Concentration Ratios in Manufacturing. Subject Series EC92m315, June, 2001.
747.439.723.214Women’s dresses586.242.922.613Fresh or frozen seafood
2012.150.336.526Curtains and draperies890594532Book printing639554234Wood office furniture239665131Dolls761503626Travel trailers and campers
NUMBEROF
FIRMS
TWENTYLARGEST
FIRMS
EIGHTLARGEST
FIRMS
FOURLARGEST
FIRMSINDUSTRY
DESIGNATION
Percentage of Value of Shipments Accounted for by the Largest Firms in Selected Industries, 1992
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
Product Differentiation,Advertising, and Social Welfare
• Product differentiation is a strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers’ minds. This differentiation is often accomplished through advertising.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
The Case for ProductDifferentiation and Advertising
• The advocates of free and open competition believe that differentiated products and advertising give the market system its vitality and are the basis of its power.
• Product differentiation helps to ensure high quality and efficient production.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
The Case for ProductDifferentiation and Advertising
• Advertising provides consumers with the valuable information on product availability, quality, and price that they need to make efficient choices in the marketplace.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
Price and Output Determinationin Monopolistic Competition
• The demand curve faced by a monopolistic competitor is likely to be less elastic than the demand curve faced by a perfectly competitive firm, but more elasticthan the demand curve faced by a monopoly.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• In the long-run, economic profits are eliminated; thus, we might conclude that monopolistic competition is efficient, however:
• Price is above marginal cost. More output could be produced at a resource cost below the value that consumers place on the product.
• Average total cost is not minimized. The typical firm will not realize all the economies of scale available. Smaller and smaller market share results in excess capacity.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• The Cournot model is a model of a two-firm industry (duopoly) in which a series of output-adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• The kinked demand curve model is a model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink follows from the assumption that competitive firms will follow if a single firm cuts price but will not follow if a single firm raises price.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• Above P*, an increase in price, which is not followed by competitors, results in a large decrease in the firm’s quantity demanded (demand is elastic).
• Below P*, price decreases are followed by competitors so the firm does not gain as much quantity demanded (demand is inelastic).
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• The practice of a large, powerful firm driving smaller firms out of the market by temporarily selling at an artificially low price is called predatory pricing.
• Such behavior became illegal in the United States with the passage of antimonopoly legislation around the turn of the century.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• Regardless of what B does, it pays for A to advertise. This is the dominant strategy, or the strategy that is best no matter what the opposition does.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• The strategy to respond in a way that lets your competitors know you will follow their lead is called tit-for-tat strategy. If one leads and the competitor follows, both will be better off.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• A market is perfectly contestable if entry to it and exit from it are costless.
• In contestable markets, even large oligopolistic firms end up behaving like perfectly competitive firms. Prices are pushed to long-run average cost by competition, and positive profits do not persist.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• Oligopolies are concentrated industries. At one extreme is the cartel, in essence, acting as a monopolist. At the other extreme, firms compete for small contestable markets in response to observed profits. In between are a number of alternative models, all of which stress the interdependence of oligopolistic firms.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly
• The Herfindahl-Hirschman Index (HHI) is a mathematical calculation that uses market share figures to determine whether or not a proposed merger will be challenged by the government.
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C H A P T E R 13: Monopolistic Competition and Oligopoly
C H A P T E R 13: Monopolistic Competition and Oligopoly