9

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Monopolistic Competition and
Oligopoly

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Monopolistic Competition

• Relatively large number of sellers

• Differentiated products
• Easy entry and exit

LO1 9-2
 Price and Output in Monopolistic Competition

• Demand curve is downward-

slopping
• Elasticity of demand is less than
infinity

• Factors affect elasticity of demand

LO2 9-3
 The Short Run: Profit or Loss

MC ATC
Price and Costs

P1
A1

Economic D1
Profit
MR = MC

MR

0
Q1
Quantity

LO2 9-4
 The Short Run: Profit or Loss

MC ATC

A2
Price and Costs

P2

Loss
D2

MR = MC

MR

0
Q2
Quantity

LO2 9-5
 The Long Run: Only a Normal Profit

MC
ATC
Price and Costs

P3= A3

D3

MR = MC

MR

0
Q3
Quantity

LO2 9-6
 Oligopoly

• A few large firms dominate the market

• Homogeneous or differentiated
products
• High degree of Mutual
interdependence
• High barriers of entry
• Price rigidity and non-price
competition

LO3 9-7
 Kinked Demand Curve Model

• Assumptions:
Rivals match price reductions
Rivals ignore price increses

LO5 9-8
 Kinked-Demand Curve

D2 MC1

MR2 e
MC2
P0 f

D1

Q0
MR1

LO5 9-9
 Kinked-Demand Curve

• Criticisms
• Explains inflexibility, not price
• Prices are not that rigid

LO6 9-10
 Price Leadership Model

• Assumptions:
Dominant firm initiates price
changes
Other firms follow the leader

LO6 9-11
 Perfect Collusion

• Cartels: a group of firms or nations

that collude to
• formally agree to the same price
• restrict output levels for members

LO6 9-12