AP MIcro Monopolistic Competition and Oligolopy

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AP MIcro Monopolistic Competition and Oligolopy

  1. 1. Monopolistic Competition and Oligopoly 25C H A P T E R
  2. 2. Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Monopolistic Competition: •Relatively Large Number of Sellers •Differentiated Products •Easy Entry and Exit
  3. 3. CHARACTERISTICS Relatively Large Number of Sellers •Small Market Shares •Independent Action
  4. 4. Differentiated Products • Product Attributes • Service • Location • Brand Names and Packaging • Some Control Over Price • Easy Entry and Exit • Advertising CHARACTERISTICS
  5. 5. D MR P1 ATC PriceandCosts Q1 Short-Run Economic Profits Expect New Competitors PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A1 MC
  6. 6. D MR P1 ATC PriceandCosts Q1 Expect New Competitors PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A1 New competition drives down the price level – leading to economic losses in the short run. MC Short-Run Economic Profits
  7. 7. D MR MC P2 ATC PriceandCosts Q2 Short-Run Economic Losses PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A2
  8. 8. Short-Run Economic Losses D MR MC P2 ATC PriceandCosts Q2 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A2 With economic losses, firms will exit the market – stability occurs when economic profits are zero.
  9. 9. D MR MC P3 = A3 ATC PriceandCosts Q3 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity Long-Run Equilibrium Normal Profit Only
  10. 10. MONOPOLISTIC COMPETITION AND EFFICIENCY • Not Productively Efficient  Minimum ATC • Not Allocatively Efficient Price  MC • Excess Capacity Graphically…
  11. 11. D MR MC P3 = A3 ATC PriceandCosts Q3 Quantity Long-Run Equilibrium Price is Not = Minimum ATC Price  MC MONOPOLISTIC COMPETITION AND EFFICIENCY
  12. 12. MONOPOLISTIC COMPETITION AND EFFICIENCY Product Variety • Benefits of Product Variety • Nonprice Competition • Advertising Role • Trial & Error Search for Maximum Profits
  13. 13. Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Oligopoly: •A Few Large Producers •Homogeneous or Differentiated Products •Control Over Price, But Mutual Interdependence •Strategic Behavior •Entry Barriers
  14. 14. OLIGOPOLIES AND MERGERS Mergers Measures of Industry Concentration •Concentration Ratio •Localized Markets •Interindustry Competition •World Trade •Import Competition
  15. 15. OLIGOPOLIES AND MERGERS Mutual Interdependence Game-Theory Model Collusive Tendencies •Collusion Incentive to Cheat Introduction to Game Theory…
  16. 16. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15
  17. 17. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15 Greatest Combined Profit
  18. 18. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15 Independent Actions Stimulate Response
  19. 19. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15 Independent Actions Stimulate Response Gravitating to the Worst Case
  20. 20. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15 Collusion Invites a Different Solution.
  21. 21. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15 Collusion Invites a Different Solution.
  22. 22. OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low High Low Uptown’sPriceStrategy RareAir’s Price Strategy BA DC $12 $15 $12 $6 $6 $8 $8$15 But, the incentive to cheat is very real. Collusion Invites a Different Solution.
  23. 23. No Standard Model due to... Diversity of Oligopolies Complications of Interdependence 1 – Kinked Demand Curve 2 – Cartels and Collusion 3 – Price Leadership THREE OLIGOPOLY MODELS Alternative Models:
  24. 24. D1 MR1 Quantity The firm’s demand and marginal revenue curves KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price
  25. 25. MR2 D1 D2 MR1 Quantity The rival’s demand and marginal revenue curves KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price
  26. 26. MR2 D1 D2 MR1 Quantity KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price Rivals tend to follow a price cut
  27. 27. MR2 D1 D2 MR1 Quantity KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price Rivals tend to follow a price cut or ignore a price increase
  28. 28. MR2 D1 D2 MR1 Quantity Effectively creating a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price
  29. 29. D Quantity Effectively creating a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price
  30. 30. D MR1 Quantity Effectively creating a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MC2 MC1 MR2
  31. 31. D Quantity Profit maximization MR = MC occurs at the kink. KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MC2 MC1 MR2 MR1
  32. 32. D Quantity This behavior can set off a price war. KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MC2 MC1 MR2 MR1
  33. 33. If a few firms face identical or highly similar demand and costs... Oligopoly is conducive to collusion. they will tend to seek joint profit maximization. CARTELS AND OTHER COLLUSION Graphically…
  34. 34. Colluding Oligopolists Will Split the Monopoly Profits. D MC ATC MR Economic Profit MR = MC Priceandcosts Q0 P0 A0 CARTELS AND OTHER COLLUSION
  35. 35. Overt Collusion •Cartels Defined •The OPEC Cartel Covert Collusion •Recent Examples •U.S. Illegality •Tacit CARTELS AND OTHER COLLUSION
  36. 36. Obstacles to Collusion •Demand and Cost Differences •Number of Firms •Cheating •Recession •Potential Entry CARTELS AND OTHER COLLUSION
  37. 37. OLIGOPOLY AND EFFICIENCY Productive Efficiency P = Minimum ATC Allocative Efficiency P = MC Oligopoly: No Productive Efficiency Oligopoly: No Allocative Efficiency Qualifications
  38. 38. monopolistic competition product differentiation nonprice competition excess capacity oligopoly homogeneous oligopoly differentiated oligopoly strategic behavior interindustry competition import competition Herfindahl index game-theory model collusion kinked-demand curve price war cartel tacit understandings price leadership ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005
  39. 39. Next... Chapter 26 Technology, R&D, and Efficiency

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