Chapter 7 section 2 Monopolistic Competition and Oligopoly

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Chapter 7 section 2 Monopolistic Competition and
Oligopoly

• Monopolistic competition-A market structure w/
  low entry barriers and many firms selling
  products differentiated enough that each firms
  demand curve slopes downward.

2
Market Characteristics

• B/c barriers to entry are low, firms in
  monopolistic competition can, in the long run,
  enter or leave the market w/ ease.
• Market characteristics

3
Product Differentiation

• Physical Differences, color, packaging, scent,
  design.
• Location, variety of locations where a
  product is available (differentiation).
  Available everywhere in the internet.
• Services, products differ in accompanying
  services.
• Product Image, a final way products differ is in
  the image the producer tries to foster in the
  consumers mind.

4
Costs of Product Differentiation

• Firms spend more on advertising and promotional
  expenses to differentiate their products.
• Increases average cost.
• Too many firms product differentiation,
  artificial.

5
Excess Capacity

• Means that a firm could lower its average cost by
  selling more.
• Gas stations, drug stores, banks, convenience
  stores, restaurants, motels, bookstores, and
  flower shops

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Oligopoly

• Market dominated by just a few firms
• 3 or 4 firms account for three-quarters of
  market output.
• B/c an oligopoly has a few firms, each must
  consider the effect of its own actions on
  competitors behavior.
• Industries-market for steel, oil, automobiles,
  breakfast cereals, tobacco.

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Undifferentiated oligopoly

• Sells commodity, ingot of steel or a barrel of
  oil. Oligopolies, such as automobiles or
  breakfast cereals, the product is differentiated
  across producers.

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Differentiated oligopoly

• Sells products that differ across producers, such
  as Ford versus Toyota or General Foods Wheaties
  versus Kellogs Corn Flakes.

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Firms in oligopoly

• Interdependent
• If any changes in price, output, or advertising
  may prompt a reaction from its rival.
• Firm may react if another firms alters any of
  these features.

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Barriers of Entry

• An oligopoly can be traced to some barrier to
  entry, such as economies of scale or brand names
  built up by years of advertising.
• Economies of Scale-
• Minimum efficient scale is the lowest rate of
  output at which the firm takes full advantage of
  economies of scale.

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The High Cost of Entry

• The total investment needed to reach the
  minimum-efficient size often is huge
• New company has to pay a huge sum, pay for
  advertising.
• If the product fails, that would cripple the
  company.

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Product Differentiation Costs

• Oligopolists spend billions of dollars to
  differentiate their products.
• Ex. Pepsi and Coca Cola

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Cartel

• Is a group of firms that agree to act as a single
  monopolist to increase the market price and
  maximize the groups profits.
• Produce less, charge higher prices, earn more
  profit, block entry market.
• Illegal in the USA
• Ex. OPEC
• Obstacles- cheat, entry of rival firms, fear
  technological change erode their power.