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