Rivalry, Oligopoly, and Monopolistic Competition

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• Chapter 11
• Rivalry, Oligopoly, and Monopolistic Competition

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Rivalry vs. Competition

• In the phrase perfect competition, the word
  competition refers to market structure.
• In everyday conversation, we often use
  competition to mean business rivalry between
  firms that are oligopolists or monopolistic
  competitors

The ongoing struggle for market share between
Boeing and Airbus is an example of business
rivalry between oligopolists
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Oligopolistic Interdependence

• The term oligopolistic interdependence means the
  need to pay close attention to the actions of
  rivals when making pricing or production decisions

Even small firms like street vendors can exhibit
oligopolistic interdependence
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Cartels

• A cartel is a group of firms that work together
  to maximize their joint profits by fixing prices
  and limiting output.
• Cheating by members often causes cartels to
  collapse or limits their ability to keep prices
  high.

The Organization of Petroleum Exporting Countries
(OPEC) is the worlds best-known cartel
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Competition vs. Cartel

• This graph shows an industry made up of 100
  firms, each producing at a constant long-run
  average and marginal cost.
• If the firms act like perfect competitors, the
  industry will be in equilibrium at the point at
  which the demand and marginal cost curves
  intersect.
• A cartel can jointly earn profits by restricting
  output to the point at which marginal cost equals
  marginal revenue and raising the price from 1 to
  2.

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Cartels

• Oligopoly can be analyzed in terms of game theory
  
• In a Nash equilibrium solution to a game, each
  firms strategy is optimal when it assumes that
  its rival also pursues an optimal strategy

Oligopoly can be viewed as a game in which rivals
plan moves and countermoves to try to win market
share
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Cartels

• The figure shows the profits Alpha Company would
  earn under each price or its profits and the
  profits of its rival Zed Enterprises.
• If both set their prices at 5, each will earn
  400.
• If both lower their prices to 4, they will each
  will earn 360.
• If Alpha lowers its price while Zed does not, it
  will steal many customers and earn 540 while
  Zeds profits fall to 200.
• If Zed lowers its price while Alphas remains at
  5, Zed will steal many customers, earning 50
  and leaving Alpha with only 200.

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Short-Run Equilibrium Under Monopolistic
Competition

• Under monopolistic competition, each firm is a
  price searcher with a negatively sloped demand
  curve.
• There are no barriers to entry by new firms.
• In the short run, a firm that produces at the
  point where marginal cost equals marginal revenue
  can earn pure economic profits

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Long-Run Equilibrium Under Monopolistic
Competition

• In the long run, new firms are attracted to the
  market. That lowers each firms demand curve.
• The fight to keep market share may increase
  costs.
• Entry by new firms will continue until the market
  reaches a long-run equilibrium where pure
  economic profit disappears.