Monopolistic Competition Characteristics

Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms

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CHAPTER

Superio r Cheese

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Monopolistic Competition and Oligopoly
Copyright McGraw-Hill/Irwin, 2005

Monopolistic Competition Characteristics

FOUR MARKET MODELS Monopolistic Competition:

Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms

• Relatively Large Number of Sellers • Differentiated Products • Easy Entry and Exit
Pure Competition Monopolistic Competition Oligopoly Pure Monopoly

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Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005

CHARACTERISTICS
Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms

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Relatively Large Number of Sellers •Small Market Shares •No Collusion •Independent Action

Copyright McGraw-Hill/Irwin, 2005

Monopolistic Competition Characteristics

Differentiated Products
• Product Attributes • Service • Location • Brand Names and Packaging • Some Control Over Price • Easy Entry and Exit • Advertising

CHARACTERISTICS

Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms

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Copyright McGraw-Hill/Irwin, 2005

2005 .5 Next Slide Copyright McGraw-Hill/Irwin.Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC ATC Price and Costs P1 A1 Short-Run Economic Profits MR Q1 Quantity D Previous Slide End Show 25 .

1 1 Short-Run Economic Profits MR Q1 Quantity D Previous Slide End Show 25 . 2005 .Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC ATC Price and Costs New competition drives down the P price level – leading to economic A losses in the short run.6 Next Slide Copyright McGraw-Hill/Irwin.

2005 Q2 Quantity .7 Next Slide Copyright McGraw-Hill/Irwin.Monopolistic Competition Characteristics PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC ATC Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Price and Costs A2 P2 Short-Run Economic Losses D MR Previous Slide End Show 25 .

firms will P exit the market – stability occurs Short-Run when economic profits are zero. 2 2 Economic Losses D MR Previous Slide End Show 25 .8 Next Slide Copyright McGraw-Hill/Irwin. 2005 Q2 Quantity .Monopolistic Competition Characteristics PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC ATC Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Price and Costs A With economic losses.

Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Long-Run Equilibrium MC Normal Profit Only ATC Price and Costs P3 = A3 D MR Previous Slide End Show 25 . 2005 Q3 Quantity .9 Next Slide Copyright McGraw-Hill/Irwin.

10 Next Slide . 2005 Previous Slide End Show 25 .Monopolistic Competition Characteristics MONOPOLISTIC COMPETITION AND EFFICIENCY Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms • Not Productively Efficient ≠ Minimum ATC • Not Allocatively Efficient Price ≠ MC • Excess Capacity Graphically… Copyright McGraw-Hill/Irwin.

Monopolistic Competition Characteristics MONOPOLISTIC COMPETITION AND EFFICIENCY Long-Run Equilibrium MC Price is Not = Minimum ATC ATC Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Price and Costs P3 = A3 Price ≠ MC D MR Previous Slide End Show 25 .11 Next Slide Copyright McGraw-Hill/Irwin. 2005 Q3 Quantity .

Monopolistic Competition Characteristics MONOPOLISTIC COMPETITION AND EFFICIENCY Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 .12 Next Slide • Benefits of Product Variety • Nonprice Competition • Advertising Role • Trial & Error Search for Maximum Profits Copyright McGraw-Hill/Irwin. 2005 Product Variety .

Monopolistic Competition Characteristics FOUR MARKET MODELS Oligopoly: • A Few Large Producers • Homogeneous or Differentiated Products • Control Over Price.13 Next Slide Pure Monopoly Market Structure Continuum Copyright McGraw-Hill/Irwin. But Mutual Interdependence •Strategic Behavior • Entry Barriers Pure Monopolistic Competition Competition Oligopoly Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 . 2005 .

2005 .14 Next Slide Mergers Measures of Industry Concentration • Concentration Ratio • Localized Markets • Interindustry Competition • World Trade • Import Competition Copyright McGraw-Hill/Irwin.OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 .

OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Herfindahl Index Sum of the squared percentage market shares for all firms in the industry – Places greater weight upon the larger firms (%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2 Previous Slide End Show 25 . (Pure competition is near zero.15 Next Slide A greater Herfindahl Index indicates a greater concentration of market power in the industry.) Copyright McGraw-Hill/Irwin. 2005 .

OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 .16 Next Slide Mutual Interdependence Game-Theory Model Collusive Tendencies •Collusion Incentive to Cheat Introduction to Game Theory… Copyright McGraw-Hill/Irwin. 2005 .

17 Next Slide Low C $15 $6 D $8 $8 Copyright McGraw-Hill/Irwin.OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Uptown’s Price Strategy Three Oligopoly Models A High $12 B $6 $15 $12 Previous Slide End Show 25 . 2005 .

18 Next Slide Low C $15 $6 D $8 $8 Copyright McGraw-Hill/Irwin.OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Uptown’s Price Strategy Three Oligopoly Models A High $12 B $6 $15 $12 Greatest Combined Profit Previous Slide End Show 25 . 2005 .

OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Uptown’s Price Strategy Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms A High $12 B $6 $15 $12 Independent Actions Stimulate Response Previous Slide End Show 25 . 2005 .19 Next Slide Low C $15 $6 D $8 $8 Copyright McGraw-Hill/Irwin.

OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Uptown’s Price Strategy Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms A High $12 B $6 $15 $12 Independent Actions Stimulate Response Previous Slide End Show 25 .20 Next Slide Low C $15 $6 D $8 $8 Gravitating to the Worst Case Copyright McGraw-Hill/Irwin. 2005 .

OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Uptown’s Price Strategy Three Oligopoly Models A High $12 B $6 $15 $12 Collusion Invites a Different Solution. Previous Slide End Show 25 .21 Next Slide Low C $15 $6 D $8 $8 Copyright McGraw-Hill/Irwin. 2005 .

22 Next Slide Low C $15 $6 D $8 $8 Copyright McGraw-Hill/Irwin. Previous Slide End Show 25 .OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Uptown’s Price Strategy Three Oligopoly Models A High $12 B $6 $15 $12 Collusion Invites a Different Solution. 2005 .

the incentive to cheat is very real.OLIGOPOLY BEHAVIOR Monopolistic Competition Characteristics A Game-Theory Overview RareAir’s Price Strategy High Low Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Uptown’s Price Strategy Three Oligopoly Models A High $12 B $6 $15 $12 Collusion Invites a Different Solution. But. 2005 .23 Next Slide Low C $15 $6 D $8 $8 Copyright McGraw-Hill/Irwin. Previous Slide End Show 25 .

24 Next Slide 1 – Kinked Demand Curve 2 – Cartels and Collusion 3 – Price Leadership Copyright McGraw-Hill/Irwin. Previous Slide End Show 25 . 2005 ...THREE OLIGOPOLY MODELS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Diversity of Oligopolies Complications of Interdependence Alternative Models: No Standard Model due to.

KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY The firm’s demand and marginal revenue curves Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 . 2005 MR1 .25 Next Slide Price Cartels and Collusion D1 Quantity Copyright McGraw-Hill/Irwin.

KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY The rival’s demand and marginal revenue curves Price Leadership Oligopoly and Efficiency Key Terms Price Cartels and Collusion D2 MR2 Previous Slide End Show 25 .26 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin. 2005 MR1 .

KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut Price Leadership Oligopoly and Efficiency Key Terms Price Cartels and Collusion D2 MR2 Previous Slide End Show 25 .27 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin. 2005 MR1 .

28 Next Slide Price Cartels and Collusion D1 Quantity Copyright McGraw-Hill/Irwin. 2005 MR1 .KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut or ignore a price increase D2 MR2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 .

2005 MR1 .KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY Effectively creating a kinked demand curve Price Leadership Oligopoly and Efficiency Key Terms Price Cartels and Collusion D2 MR2 Previous Slide End Show 25 .29 Next Slide D1 Quantity Copyright McGraw-Hill/Irwin.

KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY Effectively creating a kinked demand curve Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 . 2005 .30 Next Slide Price Cartels and Collusion D Quantity Copyright McGraw-Hill/Irwin.

KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY Effectively creating a kinked demand curve MC1 Price Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms MR2 MC2 Previous Slide End Show 25 .31 Next Slide D Quantity Copyright McGraw-Hill/Irwin. 2005 MR1 .

32 Next Slide Price Cartels and Collusion D Quantity Copyright McGraw-Hill/Irwin.KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY Profit maximization MR = MC occurs at the kink. MC1 MR2 MC2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 . 2005 MR1 .

KINKED DEMAND THEORY: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory NONCOLLUSIVE OLIGOPOLY This behavior can set off a price war.33 Next Slide Price Cartels and Collusion D Quantity Copyright McGraw-Hill/Irwin. MC1 MR2 MC2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 . 2005 MR1 .

.. Copyright McGraw-Hill/Irwin.CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Oligopoly is conducive to collusion. 2005 Graphically… . If a few firms face identical or highly similar demand and costs. Previous Slide End Show 25 .34 Next Slide they will tend to seek joint profit maximization.

35 Next Slide MR Copyright McGraw-Hill/Irwin.CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Price and costs Colluding Oligopolists Will Split the Monopoly Profits. 2005 . Economic Profit MC ATC D MR = MC Q0 P0 A0 Previous Slide End Show 25 .

36 Next Slide Overt Collusion •Cartels Defined •The OPEC Cartel Covert Collusion •Recent Examples •U.CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 . 2005 .S. Illegality •Tacit Understandings Copyright McGraw-Hill/Irwin.

2005 .CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Obstacles to Collusion • Demand and Cost Differences • Number of Firms • Cheating • Recession • Potential Entry • Antitrust Law Previous Slide End Show 25 .37 Next Slide Copyright McGraw-Hill/Irwin.

38 Next Slide Leadership Tactics •Infrequent Price Changes •Communications •Limit Pricing Breakdowns in Price Leadership-Price Wars Copyright McGraw-Hill/Irwin. 2005 .PRICE LEADERSHIP MODEL Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 .

OLIGOPOLY AND ADVERTISING Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms • Less Easily Duplicated Previous Slide End Show 25 .39 Next Slide • Adequate Resources • Positive Effects of Advertising • Potential Negative Effects of Advertising • Brand Development Copyright McGraw-Hill/Irwin. 2005 .

40 Next Slide Qualifications Copyright McGraw-Hill/Irwin.OLIGOPOLY AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Productive Efficiency P = Minimum ATC Allocative Efficiency P = MC Oligopoly: No Productive Efficiency Oligopoly: No Allocative Efficiency Previous Slide End Show 25 . 2005 .

Inc. 2005 BACK END .interindustry competit monopolistic competition import competition product differentiation nonprice competitionHerfindahl index game-theory model excess capacity collusion oligopoly kinked-demand curve homogeneous oligopoly price war differentiated oligopoly cartel strategic behavior tacit understandings mutual interdependence price leadership concentration ratio Copyright McGraw-Hill/Irwin.

42 Next Slide Technology... and Efficiency Chapter 26 Copyright McGraw-Hill/Irwin. R&D. 2005 . Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 .Monopolistic Competition Characteristics Next.

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