9. Monopolistic Competition & Oligopoly Monopolistic Competition Oligopoly Monopolistic Competition...
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Transcript of 9. Monopolistic Competition & Oligopoly Monopolistic Competition Oligopoly Monopolistic Competition...
9. Monopolistic Competition9. Monopolistic Competition& Oligopoly& Oligopoly
9. Monopolistic Competition9. Monopolistic Competition& Oligopoly& Oligopoly
• Monopolistic Competition
• Oligopoly• Monopolistic Competition
• Oligopoly
Measuring market dominanceMeasuring market dominanceMeasuring market dominanceMeasuring market dominance
• 4-firm conentration ratio• % sales from 4 largest firms• > 40% then oligopoly• < 40% then monopolistic comp.
• 4-firm conentration ratio• % sales from 4 largest firms• > 40% then oligopoly• < 40% then monopolistic comp.
Herfindahl-Hirschman Index (HHI)Herfindahl-Hirschman Index (HHI)Herfindahl-Hirschman Index (HHI)Herfindahl-Hirschman Index (HHI)
• largest 50 firms
• sum square of % market share
• used by Justice Department
• if monopoly
= (100)2 = 10,000
• largest 50 firms
• sum square of % market share
• used by Justice Department
• if monopoly
= (100)2 = 10,000
HHI (cont.)HHI (cont.)HHI (cont.)HHI (cont.)
• if < 1000• market is competitive
• if > 1800• market is uncompetitive
• if < 1000• market is competitive
• if > 1800• market is uncompetitive
OligopolyOligopolyOligopolyOligopoly
• small number of firms
• interdependent behavior
• barriers to entry
• small number of firms
• interdependent behavior
• barriers to entry
examplesexamplesexamplesexamples
• Airlines
• Automobiles
• Cereal
• Soft Drinks
• Airlines
• Automobiles
• Cereal
• Soft Drinks
what types of barriers?what types of barriers?what types of barriers?what types of barriers?
• economies of scale• auto industry
• legal restrictions
• brand recognition• cereal, soft drinks
• control over essential resource
• economies of scale• auto industry
• legal restrictions
• brand recognition• cereal, soft drinks
• control over essential resource
Firm behaviorFirm behaviorFirm behaviorFirm behavior
• no one model of behavior
• set of possible behaviors• no one model of behavior
• set of possible behaviors
CartelCartelCartelCartel
• firms collude to act like a single monopolist• restrict output, charge higher price• block entry
• firms collude to act like a single monopolist• restrict output, charge higher price• block entry
Price leadershipPrice leadershipPrice leadershipPrice leadership
• informal collusion
• dominant firm sets price• other firms follow to avoid a price
war• steel, airline, auto industries
• informal collusion
• dominant firm sets price• other firms follow to avoid a price
war• steel, airline, auto industries
• cartels are tough to maintain• each firm has output quota• each firm tempted to cheat• tough to block new entry
• cartels are tough to maintain• each firm has output quota• each firm tempted to cheat• tough to block new entry
Collusion and CartelsCollusion and CartelsCollusion and CartelsCollusion and Cartels
• firms may collude• divide market• fix prices• illegal in U.S.
• examples• OPEC• ADM & others
• firms may collude• divide market• fix prices• illegal in U.S.
• examples• OPEC• ADM & others
Monopolistic CompetitionMonopolistic CompetitionMonopolistic CompetitionMonopolistic Competition
• large # of firms
• product differentiation
• compete w/ quality, price, marketing
• no one firm dominates
• no collusion among firms
• free to enter/exit
• large # of firms
• product differentiation
• compete w/ quality, price, marketing
• no one firm dominates
• no collusion among firms
• free to enter/exit
examplesexamplesexamplesexamples
• running shoes
• fast food franchises
• clothing
• cleaning supplies
• beauty products
• running shoes
• fast food franchises
• clothing
• cleaning supplies
• beauty products
product differentiationproduct differentiationproduct differentiationproduct differentiation• physical differences• color, size, taste ...
• location• convenience, drug stores
• services• delivery
• image• high quality vs. value
• physical differences• color, size, taste ...
• location• convenience, drug stores
• services• delivery
• image• high quality vs. value
Firm Behavior, short runFirm Behavior, short runFirm Behavior, short runFirm Behavior, short run
• Tommy Hilfiger Jeans
• demand curve downward sloping• less elastic than perfect
competition• more elastic than a monopolist
• choose price & output• like a monopolist
• Tommy Hilfiger Jeans
• demand curve downward sloping• less elastic than perfect
competition• more elastic than a monopolist
• choose price & output• like a monopolist
P, cost
Q (jeans/day)
DMR
MC
150
$70
P, cost
Q (jeans/day)
DMR
MC
150
$70 ATC
$20
economic profit($70-$20)(150)= $7500
Long RunLong RunLong RunLong Run
• zero economic profit
• why?• economic profit leads to entry• economic loss leads to exit• no entry/exit with zero economic
profit
• zero economic profit
• why?• economic profit leads to entry• economic loss leads to exit• no entry/exit with zero economic
profit
Excess capacityExcess capacityExcess capacityExcess capacity
• firms output is not at minimum of ATC• output too small• loss of economic welfare
• firms output is not at minimum of ATC• output too small• loss of economic welfare
Advertising & marketingAdvertising & marketingAdvertising & marketingAdvertising & marketing
• firms in monopolistic competition spend more on this than perfect competition• cost curves are higher• is this a waste? Or• do consumer benefit from greater
selection?
• firms in monopolistic competition spend more on this than perfect competition• cost curves are higher• is this a waste? Or• do consumer benefit from greater
selection?
SummarySummarySummarySummary
• between perfect competition & monopoly
• monopolistic comp. chooses P & Q like a monopolistic
• oligopolist behavior interdependent
• importance of product differentiation
• importance of strategic behavior
• between perfect competition & monopoly
• monopolistic comp. chooses P & Q like a monopolistic
• oligopolist behavior interdependent
• importance of product differentiation
• importance of strategic behavior