Monopolistic competition and oligopoly are two market structures between perfect competition and monopoly. Monopolistic competition is characterized by many firms with differentiated products, easy entry and exit, and firms making positive profits in the short run but zero in the long run. Oligopoly is characterized by a small number of interdependent firms where the actions of one firm impact others and strategic behavior can result in inefficient outcomes.
A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
Imperfect competition covers all situations where there is neither pure competition nor pure monopoly.
Perfect competition and pure monopoly are very unlikely to be found in the real world.
In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition.
Monopoly refers to the market situation where there is a
Single seller selling a product which has no close substitutes.
Monopolies are characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the existence of a high monopoly price well above the firm's marginal cost that leads to a high monopoly profit
The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few” ,few firms or few sellers.
DEFINATION:
Oligopoly is that form of market where there are few firms and there is natural interdependence among the firms regarding price and output policy.
A market can be defined as a group of firms willing and able to sell a similar product or service to the same potential buyers.
Imperfect competition covers all situations where there is neither pure competition nor pure monopoly.
Perfect competition and pure monopoly are very unlikely to be found in the real world.
In the real world, it is the imperfect competition lying between perfect competition and pure monopoly.
The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition.
Monopoly refers to the market situation where there is a
Single seller selling a product which has no close substitutes.
Monopolies are characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the existence of a high monopoly price well above the firm's marginal cost that leads to a high monopoly profit
The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few” ,few firms or few sellers.
DEFINATION:
Oligopoly is that form of market where there are few firms and there is natural interdependence among the firms regarding price and output policy.
Chapter 13A monopolistically competitive market is characterized.docxketurahhazelhurst
Chapter 13
A monopolistically competitive market is characterized by:
· many buyers and sellers,
· differentiated products, and
· easy entry and exit.
The monopolistically competitive market is similar to perfect competition in that there are many buyers and sellers who can enter or leave the market easily in response to economic profits or losses. A monopolistically competitive firm, though, is similar to a monopoly in that it produces a product that is different from that produced by all other firms in the market. The restaurant market in New York City provides a good example of a monopolistically competitive market. Each restaurant has its own recipes, decor, ambiance, etc. but also must compete with many other similar restaurants.
Because each firm produces a differentiated product, it won't lose all of its customers if it raises its prices. Thus, a monopolistically competitive firm faces a downward sloping demand curve for its product. As noted in Chapters 8 and 10, whenever a firm faces a downward sloping demand curve, its marginal revenue curve lies below its demand curve. The diagram below illustrates the relationship that exists between a monopolistically competitive firm's demand and marginal revenue curves.
While the diagram above seems similar to the demand and marginal revenue curves facing a monopolist, there is a critical difference. In a monopolistically competitive market, the number of firms changes as firms enter or leave the industry. When new firms enter the market, the customers are spread over a larger number of firms and the demand for each firm's product declines. An increase in the number of firms also tends to result in an increase in the elasticity of demand for each firm's products (since demand is more elastic when more substitutes are available). The diagram below illustrates the shift in a typical firm's demand curve that occurs when additional firms enter a monopolistically competitive market.
Short-run and long-run equilibrium in monopolistically competitive markets
Let's examine the determination of short-run equilibrium in a monopolistically competitive output market.
The diagram below illustrates a possible short-run equilibrium for a typical firm in a monopolistically competitive market. As with any profit-maximizing firm, a monopolistically competitive firm maximizes its profits by producing at a level of output at which MR = MC. In the diagram below, this occurs at an output level of Qo. The price is determined by the amount that customers are willing to pay to buy Qo units of output. In the example below, the demand curve indicates that a price of Po will be charged when Qo units of output are sold.
In a monopoly industry, economics profits could persist indefinitely due to the existence of barriers to entry. In a monopolistically competitive industry, however, the existence of economic profits results in the entry of additional firms into the industry. As additional firms enter, the demand for each ...
4. Nine Industries with Characteristics of Monopolistic Competition 7605 13 8 5 Miscellaneous plastic products 3089 Source: U.S. Department of Commerce, Bureau of the Census, 1992 Census of Manufacturers, Concentration Ratios in Manufacturing, Subject Series MC92-S-2, 1997. 3943 30 17 11 Women’s dresses 2335 518 41 22 14 Blowers and fans 3564 600 47 28 19 Fresh or frozen seafood 2092 1004 48 32 22 Curtains and draperies 2391 2504 62 38 23 Book publishing 2731 611 51 34 26 Wood office furniture 2521 204 67 47 34 Dolls 3942 270 72 57 41 Travel trailers and campers 3792 NUMBER OF FIRMS TWENTY LARGEST FIRMS EIGHT LARGEST FIRMS FOUR LARGEST FIRMS INDUSTRY DESIGNATION SIC NO. Percentage of Value of Shipments Accounted for by the Largest Firms in Selected Industries, 1992
5. Product Differentiation, Advertising, and Social Welfare Source: McCann Erickson, Inc., Reported in U.S. Bureau of the Census, Statistical Abstract of the United States , 1999, Table 947. 200.3 Total 10.4 Magazines 14.5 Radio 12.0 Yellow pages 31.7 Other 39.5 Direct mail 48.0 Television 44.2 Newspapers DOLLARS (BILLIONS) Total Advertising Expenditures in 1998
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17. Ten Highly Concentrated Industries 55 95 84 Small arms ammunition 3482 52 98 82 Household refrigerators and freezers 3632 Source: U.S. Department of Commerce, Bureau of the Census, 1992 Census of Manufacturers, Concentration Ratios in Manufacturing, Subject Series MC92-S-2, 1997. 398 91 84 Motor vehicles 3711 42 98 85 Cereal breakfast foods 2043 76 94 86 Electric lamp bulbs 3641 160 98 90 Malt beverages (beer) 2082 8 100 93 Cigarettes 2111 10 99 94 Household laundry equipment 3633 11 99 98 Primary copper 3331 5 100 98 Cellulosic man-made fiber 2823 NUMBER OF FIRMS EIGHT LARGEST FIRMS FOUR LARGEST FIRMS INDUSTRY DESIGNATION SIC NO. Percentage of Value of Shipments Accounted for by the Largest Firms in High-Concentration Industries, 1992
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37. Regulation of Mergers HERFINDAHL- HIRSCHMAN INDEX PERCENTAGE SHARE OF: 40 2 + 20 2 + 20 2 + 20 2 = 2,800 20 20 20 40 Industry D 25 2 + 25 2 + 25 2 + 25 2 = 2,500 25 25 25 25 Industry C 80 2 + 10 2 + 10 2 = 6,600 10 10 80 Industry B 50 2 + 50 2 = 5,000 50 50 Industry A FIRM 4 FIRM 3 FIRM 2 FIRM 1 Calculation of a Simple Herfindahl-Hirschman Index for Four Hypothetical Industries, Each With No More Than Four Firms
38. Department of Justice Merger Guidelines (revised 1984) ANTITRUST DIVISION ACTION Unconcentrated No challenge Moderate Concentration Challenge if Index is raised by more than 100 points by the merger HHI 1,800 1,000 0 Concentrated Challenge if Index is raised by more than 50 points by the merger
Editor's Notes
As new firms enter a monopolistically competitive industry in search of profits, the demand curves of profit-making existing firms begin to shift to the left, pushing marginal revenue with them as consumers switch to the new close substitutes. This process continues until profits are eliminated, which occurs for a firm when its demand curve is just tangent to its average cost curve.