Monopolistic Competition

1
Chapter 12
2
Monopolistic Competition

• Assumptions of monopolistic competition
• large number of firms
• freedom of entry
• differentiated product
• downward-sloping demand curve
• Equilibrium of the firm
• short run

3
Monopolistic Competition

• Assumptions of monopolistic competition
• large number of firms
• freedom of entry
• differentiated product
• downward-sloping demand curve
• Equilibrium of the firm
• short run
• long run

4
Monopolistic Competition

• Assumptions of monopolistic competition
• large number of firms
• freedom of entry
• differentiated product
• downward-sloping demand curve
• Equilibrium of the firm
• short run
• long run
• underutilisation of capacity in long run

5
Monopolistic Competition

• Limitations of the model
• imperfect information
• difficulty in identifying industry demand curve
• entry may not be totally free
• indivisibilities
• importance of non-price competition
• Comparing monopolistic competition with perfect
  competition and monopoly
• comparison with perfect competition

6
Monopolistic Competition

• Limitations of the model
• imperfect information
• difficulty in identifying industry demand curve
• entry may not be totally free
• indivisibilities
• importance of non-price competition
• Comparing monopolistic competition with perfect
  competition and monopoly
• comparison with perfect competition
• comparison with monopoly

7
Oligopoly

• Key features of oligopoly
• barriers to entry
• interdependence of firms
• incentives to compete versus incentives to
  collude
• Factors favouring collusion
• Collusive oligopoly cartels
• equilibrium of the industry
• allocating and enforcing quotas

8
Oligopoly

• Tacit collusion
• price leadership dominant firm
• price leadership barometric

9
Oligopoly

• Tacit collusion
• price leadership dominant firm
• price leadership barometric
• other forms of tacit collusion rules of thumb
• average cost pricing

10
Oligopoly

• Tacit collusion
• price leadership dominant firm
• price leadership barometric
• other forms of tacit collusion rules of thumb
• average cost pricing
• price benchmarks

11
Oligopoly

• Tacit collusion
• price leadership dominant firm
• price leadership barometric
• other forms of tacit collusion rules of thumb
• average cost pricing
• price benchmarks
• Collusion and the law

12
Oligopoly

• Tacit collusion
• price leadership dominant firm
• price leadership barometric
• other forms of tacit collusion rules of thumb
• average cost pricing
• price benchmarks
• Collusion and the law
• The breakdown of collusion

13
Oligopoly

• Non-collusive oligopoly the kinked demand curve
  theory
• assumptions of the model

14
Oligopoly

• Non-collusive oligopoly the kinked demand curve
  theory
• assumptions of the model
• the shape of the demand and MR curves
• stable prices

15
Oligopoly

• Non-collusive oligopoly the kinked demand curve
  theory
• assumptions of the model
• the shape of the demand and MR curves
• stable prices
• limitations of the model

16
Oligopoly

• Oligopoly and the consumer
• disadvantages
• worse if there is extensive collusion
• advantages
• countervailing power
• supernormal profits may allow higher RD
• greater choice for consumers
• difficulties in drawing general conclusions
• Oligopoly and contestable markets