This document discusses different market structures: monopoly, monopolistic competition, and oligopoly. It provides details on: - Monopolistic competition is characterized by many firms producing differentiated products and competing on quality, price, and marketing. There is free entry and exit into the industry. - Firms in monopolistic competition operate at excess capacity and charge a price above marginal cost in the long-run. - Oligopoly is a market with a small number of firms where each firm's actions impact others. It can lead to interdependent behavior and the temptation for firms to collude.

1. Imperfect competition
All the assumptions of perfect competition are not met
Perfect
competition
Monopolistic
competition
Oligopoly Pure
monopoly
Increase in market power
Many small
and similar
firms
Firms with
brands
Few but
powerful firms
One firm
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2. Monopoly and How It Arises
– A monopoly is a market:
 That produces a good or service for which no close
substitute exists
 In which there is one supplier that is protected from
competition by a barrier preventing the entry of new
firms.
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3. – Monopolistic competition is a market structure in which
 A large number of firms compete.
 Each firm produces a differentiated product.
 Firms compete on product quality, price, and marketing.
 Firms are free to enter and exit the industry.
What Is Monopolistic Competition?
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4. Monopolistic Competition
Large Number of Firms
–The presence of a large number of firms in the market implies:
 Each firm has only a small market share and therefore has limited market
power to influence the price of its product
 Each firm is sensitive to the average market price, but no firm pays attention
to the actions of others. So no one firm’s actions directly affect the actions of
others.
 Collusion, or conspiring to fix prices, is impossible.
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5. Product Differentiation
– A firm in monopolistic competition practices product
differentiation if the firm makes a product that is slightly different
from the products of competing firms.
What Is Monopolistic Competition?
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6. Competing on Quality, Price, and Marketing
– Product differentiation enables firms to compete in three areas:
quality,
price,
and marketing.
 Quality includes design, reliability, and service.
 Because firms produce differentiated products, the demand for each
firm’s product is downward sloping.
But there is a tradeoff between price and quality.
 Because products are differentiated, a firm must market its product.
Marketing takes the two main forms:
advertising and packaging.
What Is Monopolistic Competition?
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7. Entry and Exit
– There are no barriers to entry in monopolistic competition, so firms cannot
make an economic profit in the long run.
Examples of Monopolistic Competition
– Producers of audio and video equipment, clothing, jewelry, computers, and
sporting goods operate in monopolistic competition.
Monopolistic Competition
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8. Price and Output in Monopolistic Competition
The Firm’s Short-Run Output and Price Decision
– A firm that has decided the quality of its product and its marketing
program produces the profit-maximizing quantity at which its
marginal revenue equals its marginal cost (MR = MC).
– Price is determined from the demand curve for the firm’s product
and is the highest price that the firm can charge for the profit-
maximizing quantity.
– Figure 12.1 shows a firm’s economic profit in the short run.
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9. – The firm in monopolistic
competition operates like
a single-price monopoly.
– The firm produces the quantity
at which MR equals MC and
sells that quantity for the
highest possible price.
– It earns an economic profit (as
in this example) when P > ATC.
Price and Output in Monopolistic Competition
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10. Profit Maximizing or Loss Minimizing
– A firm might incur an economic loss
in the short run.
– Here is an example.
– At the profit-maximizing quantity,
If P < ATC and the firm incurs an
economic loss.
Price and Output in Monopolistic Competition
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11. Monopolistic Competition and Perfect Competition
– Two key differences between monopolistic competition and perfect
competition are:
 Excess capacity
 Markup
– A firm has excess capacity if it produces less than the quantity at which
ATC is a minimum.
– A firm’s markup is the amount by which its price exceeds its marginal
cost.
Price and Output in Monopolistic Competition
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12. – Firms in monopolistic
competition operate with
excess capacity in long-run
equilibrium.
– Firms produce less than the
efficient scale—the quantity
at which ATC is a minimum.
– The downward-sloping
demand curve for their
products drives this result.
Price and Output in Monopolistic Competition
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13. Is Monopolistic Competition Efficient?
– Price equals marginal social benefit.
– The firm’s marginal cost equals marginal social cost.
– Price exceeds marginal cost, so marginal social benefit exceeds
marginal social cost.
–So the firm in monopolistic competition in the
long run produces less than the efficient
quantity.
Price and Output in Monopolistic Competition
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14. Product Development and Marketing
Innovation and Product Development
– We’ve looked at a firm’s profit-maximizing output decision in the
short run and in the long run, for a given product and with given
marketing effort.
–To keep making an economic profit, a firm in
monopolistic competition must be in a state of
continuous product development.
– New product development allows a firm to gain a competitive
edge, if only temporarily, before competitors imitate the
innovation.
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15. – Innovation is costly, but it increases total revenue.
– Firms pursue product development until the marginal revenue from
innovation equals the marginal cost of innovation.
–MR=MC innovation
Product Development and Marketing
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16. Brand Names
– Why do firms spend millions of dollars to establish a brand name
or image?
– Again, the answer is to provide information about quality and
consistency.
– You’re more likely to overnight at a Holiday Inn than at Joe’s Motel
because Holiday Inn has incurred the cost of establishing a brand
name and you know what to expect if you stay there.
Product Development and Marketing
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17. Efficiency of Advertising and Brand Names
– To the extent that advertising and selling costs provide consumers with
information and services that they value more highly than their cost, these
activities are efficient.
Product Development and Marketing
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18. In some markets, there are only a few firms which compete.
For example, computer chips are made by Intel and Advanced Micro
Devices and each firm must pay close attention to what the other firm is
doing.
When a market has only a small number of firms, do they operate in the
social interest, like firms in perfect competition? Or do they restrict output
to increase profit, like a monopoly?
………………………….Room for the oligopoly
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19. What Is Oligopoly?
–Oligopoly is a market structure in which
 Natural or legal barriers prevent the entry of new
firms.
 A small number of firms compete.
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20. – In part (b), there is a
natural oligopoly market
with three firms.
– A legal oligopoly might
arise even where the
demand and costs leave
room for a larger number
of firms.
What Is Oligopoly?
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21. Small Number of Firms
– Because an oligopoly market has a small number of firms, the firms are
interdependent and face a temptation to cooperate.
– Interdependence: With a small number of firms, each firm’s profit depends
on every firm’s actions.
– Cartel: A cartel and is an illegal group of firms acting together to limit
output, raise price, and increase profit.
– Firms in oligopoly face the temptation to form a cartel, but aside from
being illegal, cartels often break down.
– Think OPEC.
What Is Oligopoly?
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