Monopolistic Competition and Oligopoly

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Monopolistic Competitionand Oligopoly

• Chapter 12

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Monopolistic Competition

• Many firms, like pure competition
• No barriers to entry
• Product differentiation
• Branding
• Advertising
• Firms products are poor substitutes
• Firms have some market power over price
• therefore face downward-sloping demand curves at
  the firm level
• and downward-sloping MR curves

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Chapter 25 Table 25.1
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Short-run Profits under Monopolistic Competition
Chapter 25 Figure 25.1(a)
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Short-run losses under Monopolistic Competition
Chapter 25 Figure 25.1(b)
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Long-run Equilibrium Reached through Firm Entry
or Exit
Chapter 25 Figure 25.1(c)
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Long-run Inefficiency
Chapter 25 Figure 25.2
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Oligopoly

• Few large firms
• Products may be either homogeneous or
  differentiated
• Firms have market power but its limited by the
  impact of the other oligopolists
• Strategic behavior
• Mutual interdependence
• Entry barriers

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Quantifying Oligopoly

• Concentration Ratio
• industry output sold by n largest firms
• e.g., n 4
• Herfindahl Index
• (S1)2 (S2)2 (S3)2 (Sn)2
• includes data on whole industry

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Chapter 25 Table 25.2
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Payoff Matrix for a Two-firm Oligopoly
Chapter 25 Figure 25.3
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Kinky Demand
Chapter 25 Figure 25.4(a)
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Discontinuous MR with Kinky Demand
Chapter 25 Figure 25.4(b)
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Incentive for Oligopolistic Collusion
Chapter 25 Figure 25.5
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Incentives to Cheat

• Participation in a Cartel rewards Oligopolists
  with higher prices and profits
• but colluding firms must reduce output to receive
  higher prices
• The incentive to cheat
• Firms can earn even higher revenues and profits
  by selling a larger amount than they agreed
• This benefits consumers
• but harms the oligopoly partners in the cartel

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Chapter 25 Table 25.3