Bec doms ppt on monopolistic competition

1,733 views

Published on

Bec doms ppt on monopolistic competition

Published in: Business, Technology
0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,733
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
92
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

Bec doms ppt on monopolistic competition

  1. 1. Monopolistic Competition & Oligopoly <ul><li>Monopolistic Competition </li></ul><ul><li>Oligopoly </li></ul>
  2. 2. Measuring market dominance <ul><li>4-firm conentration ratio </li></ul><ul><ul><li>% sales from 4 largest firms </li></ul></ul><ul><ul><li>> 40% then oligopoly </li></ul></ul><ul><ul><li>< 40% then monopolistic comp. </li></ul></ul>
  3. 3. Herfindahl-Hirschman Index (HHI) <ul><li>largest 50 firms </li></ul><ul><li>sum square of % market share </li></ul><ul><li>used by Justice Department </li></ul><ul><li>if monopoly </li></ul><ul><ul><li>= (100) 2 = 10,000 </li></ul></ul>
  4. 4. HHI (cont.) <ul><li>if < 1000 </li></ul><ul><ul><li>market is competitive </li></ul></ul><ul><li>if > 1800 </li></ul><ul><ul><li>market is uncompetitive </li></ul></ul>
  5. 6. Oligopoly <ul><li>small number of firms </li></ul><ul><li>interdependent behavior </li></ul><ul><li>barriers to entry </li></ul>
  6. 7. examples <ul><li>Airlines </li></ul><ul><li>Automobiles </li></ul><ul><li>Cereal </li></ul><ul><li>Soft Drinks </li></ul>
  7. 8. what types of barriers? <ul><li>economies of scale </li></ul><ul><ul><li>auto industry </li></ul></ul><ul><li>legal restrictions </li></ul><ul><li>brand recognition </li></ul><ul><ul><li>cereal, soft drinks </li></ul></ul><ul><li>control over essential resource </li></ul>
  8. 9. Firm behavior <ul><li>no one model of behavior </li></ul><ul><li>set of possible behaviors </li></ul>
  9. 10. Cartel <ul><li>firms collude to act like a single monopolist </li></ul><ul><ul><li>restrict output, charge higher price </li></ul></ul><ul><ul><li>block entry </li></ul></ul>
  10. 11. Price leadership <ul><li>informal collusion </li></ul><ul><li>dominant firm sets price </li></ul><ul><ul><li>other firms follow to avoid a price war </li></ul></ul><ul><ul><li>steel, airline, auto industries </li></ul></ul>
  11. 12. <ul><li>cartels are tough to maintain </li></ul><ul><ul><li>each firm has output quota </li></ul></ul><ul><ul><li>each firm tempted to cheat </li></ul></ul><ul><ul><li>tough to block new entry </li></ul></ul>
  12. 13. Collusion and Cartels <ul><li>firms may collude </li></ul><ul><ul><li>divide market </li></ul></ul><ul><ul><li>fix prices </li></ul></ul><ul><ul><li>illegal in U.S. </li></ul></ul><ul><li>examples </li></ul><ul><ul><li>OPEC </li></ul></ul><ul><ul><li>ADM & others </li></ul></ul>
  13. 14. Monopolistic Competition <ul><li>large # of firms </li></ul><ul><li>product differentiation </li></ul><ul><li>compete w/ quality, price, marketing </li></ul><ul><li>no one firm dominates </li></ul><ul><li>no collusion among firms </li></ul><ul><li>free to enter/exit </li></ul>
  14. 15. examples <ul><li>running shoes </li></ul><ul><li>fast food franchises </li></ul><ul><li>clothing </li></ul><ul><li>cleaning supplies </li></ul><ul><li>beauty products </li></ul>
  15. 16. product differentiation <ul><li>physical differences </li></ul><ul><ul><li>color, size, taste ... </li></ul></ul><ul><li>location </li></ul><ul><ul><li>convenience, drug stores </li></ul></ul><ul><li>services </li></ul><ul><ul><li>delivery </li></ul></ul><ul><li>image </li></ul><ul><ul><li>high quality vs. value </li></ul></ul>
  16. 17. Firm Behavior, short run <ul><li>Tommy Hilfiger Jeans </li></ul><ul><li>demand curve downward sloping </li></ul><ul><ul><li>less elastic than perfect competition </li></ul></ul><ul><ul><li>more elastic than a monopolist </li></ul></ul><ul><li>choose price & output </li></ul><ul><ul><li>like a monopolist </li></ul></ul>
  17. 18. P, cost Q (jeans/day) D MR MC 150 $70
  18. 19. $20 ($70-$20)(150) = $7500 P, cost Q (jeans/day) D MR MC 150 $70 ATC economic profit
  19. 20. Long Run <ul><li>zero economic profit </li></ul><ul><li>why? </li></ul><ul><ul><li>economic profit leads to entry </li></ul></ul><ul><ul><li>economic loss leads to exit </li></ul></ul><ul><ul><li>no entry/exit with zero economic profit </li></ul></ul>
  20. 21. Excess capacity <ul><li>firms output is not at minimum of ATC </li></ul><ul><ul><li>output too small </li></ul></ul><ul><ul><li>loss of economic welfare </li></ul></ul>
  21. 22. Advertising & marketing <ul><li>firms in monopolistic competition spend more on this than perfect competition </li></ul><ul><ul><li>cost curves are higher </li></ul></ul><ul><ul><li>is this a waste? Or </li></ul></ul><ul><ul><li>do consumer benefit from greater selection? </li></ul></ul>
  22. 24. Summary <ul><li>between perfect competition & monopoly </li></ul><ul><li>monopolistic comp. chooses P & Q like a monopolistic </li></ul><ul><li>oligopolist behavior interdependent </li></ul><ul><li>importance of product differentiation </li></ul><ul><li>importance of strategic behavior </li></ul>

×