MANAGERIAL ECONOMICS 11th Edition

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MANAGERIAL ECONOMICS 11th Edition

• By
• Mark Hirschey

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Monopolistic Competition and Oligopoly

• Chapter 13

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Chapter 13OVERVIEW

• Contrast Between Monopolistic Competition and
  Oligopoly
• Monopolistic Competition
• Monopolistic Competition Process
• Oligopoly
• Cartels and Collusion
• Oligopoly Output-Setting Models
• Oligopoly Price-Setting Models
• Market Structure Measurement
• Census Measures of Market Concentration

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Chapter 13KEY CONCEPTS

• monopolistic competition
• oligopoly
• high-price/low-output equilibrium
• low-price/high-output equilibrium
• cartel
• collusion
• Cournot model
• output-reaction curve
• Stackelberg model
• first-mover advantage
• price signaling
• price leadership

• barometric price leadership
• Bertrand model
• price-reaction curve
• contestable markets theory
• Sweezy model
• kinked demand curve
• oligopoly theory
• economic census
• North American Industry Classification System
  (NAICS)
• concentration ratios
• Herfindahl-Hirschmann Index (HHI)

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Contrast Between Monopolistic Competition and
Oligopoly

• Monopolistic Competition
• Large number of relatively small sellers that
  offer similar but slightly differentiated
  products with no barriers to entry.
• Oligopoly
• Large Few sellers and each seller has a
  substantial share of the market and recognize
  their mutual interdependence (which means that
  the actions of any one firm will have an effect
  on other firms in the market and these will react
  in turn).

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Monopolistic Competition

• Monopolistic Competition Characteristics
• Many buyers and sellers.
• Product heterogeneity.
• Free entry and exit.
• Perfect information.
• Opportunity for normal profits in long-run
  equilibrium.

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Monopolistic Competition Price/Output Decisions

• Set Mp MR - MC 0 to maximize profits.
• MRMC at optimal output.
• No durable economic profits because PARAC.

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Monopolistic Competition Process

• Short-run Monopoly Equilibrium
• Monopolistically competitive firms take full
  advantage of short-run monopoly.
• Long-run High-price/Low-output Equilibrium
• With differentiated products, PAC at a point
  above minimum LRAC.
• P gt MR MC.
• Long-run Low-price/High-output Equilibrium
• With homogenous products, PAC at minimum LRAC.
• This is a competitive market equilibrium with
  homogeneous production.

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Oligopoly

• Oligopoly Market Characteristics
• Few sellers.
• Homogenous or unique products.
• Blockaded entry and exit.
• Imperfect dissemination of information.
• Opportunity for above-normal (economic) profits
  in long-run equilibrium.
• Examples of Oligopoly
• National markets for aluminum, cigarettes,
  electrical equipment, filmed entertainment,
  ready-to-eat cereals, etc.
• Local retail markets for gasoline, food,
  specialized services, etc.

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Cartels and Collusion

• Overt and Covert Agreements
• Cartels operate under formal agreements.
• Powerful cartels function as a monopoly.
• Collusion exists when firms reach secret, covert
  agreements.
• Enforcement Problem
• Cartels are typically rather short-lived because
  coordination problems often lead to cheating.
• Cartel subversion can be extremely profitable.
• Detecting the source of secret price concessions
  can be extremely difficult.

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Oligopoly Output-Setting Models

• Cournot Oligopoly
• Cournot equilibrium output is found by
  simultaneously solving output-reaction curves for
  both competitors.
• Cournot equilibrium output exceeds monopoly
  output but is less than competitive output.

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Stackelberg Oligopoly

• Stackelberg model posits a first-mover advantage.
• Price wars severely undermine profitability for
  both leading and following firms.
• Price signaling can reduce uncertainty in
  oligopoly markets.
• Price leadership occurs when firms follow the
  industry leaders pricing policy.

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Oligopoly Price-Setting Models

• Bertrand Oligopoly Identical Products
• The Bertrand model focuses upon the price
  reactions.
• The Bertrand model predicts a competitive market
  price/output solution in oligopoly markets with
  identical products.
• Bertrand Oligopoly Differentiated Products
• The Bertrand model demonstrates how price-setting
  oligopolists profit with differentiated products.

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Sweezy Oligopoly

• Sweezy model predicts sticky prices.
• Sweezy model explains why prices in oligopoly
  markets sometimes fail to respond to marginal
  cost change.

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Oligopoly Model Comparison

• Cournot model does not incorporate output
  reactions.
• Bertrand model does not incorporate price
  reactions.
• Stackelberg model explains first-mover
  advantages, but does not explain countermoves.
• Sweezy model is incomplete.
• Modeling behavior in oligopoly markets is
  difficult.

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Price Signaling
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Market Structure Measurement

• Economic Markets
• An economic market consists of all individuals
  and firms willing and able to buy or sell.
• When cross-price elasticities are large and
  positive, goods are competing products.
• Economic Census
• The economic census provides a comprehensive
  statistical profile of the economy.
• Industry statistics are classified using the
  North American Industry Classification System
  (NAICS).

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Census Measures of Market Concentration

• Concentration Ratios
• Group market share data are called concentration
  ratios.
• CRi ? Xi, where Xi is market share of the ith
  leading firm.
• CRi 100 for monopoly.
• CRi 0 for a perfectly competitive industry.
• Herfindahl-Hirschmann Index
• Calculated in percentage terms, the HHI is the
  sum of squared market shares for all competitors.
  
• HHI ? Xi2, where Xi2 is squared market share of
  the ith firm.
• HHI 10,000 for monopoly.
• HHI 0 for a perfectly competitive industry.
• Limitations of Census Information
• Slow reports hinder usefulness.
• National statistics obscure local markets.

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Self Test Problem 1
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Self Test Problem 2
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