Monopolistic Competition & Oligopoly

Principles of Microeconomics

Boris Nikolaev

Monopolistic Competition• This model was developed independently in the 1930’s by

Edward Chamberlin and Joan Robinson.

1. Many sellers

2. Each seller has a small market share

3. Product differentiation some market power some control over price

4. Free or almost free entry

5. Non-price competition (advertising)

Examples• Banks (?)• Sporting Goods• Radio Stations (?)• Fish and Seafood• Clothing • Jewelry• Computers • Fast Foods [mac ad]• Apparel Stores • Canned Goods • Convenience Stores

Short-Run (profit)

Short-run (loss)Notice that as before when ATC > p the firm is making a loss.

Long Run

Efficiency

• Robinson vs Chamberlin• Are chain stores good?

Product Differentiation

The firm controls (1) price (2) product quality (3) advertisement.

1. Quality [advertisement vs reality] [Mc Donald’s reply]

2. Location / hours of availability

3. Brand names and packaging [Nike] [reebok][reebok 2][Asics]

Non-Price Competition

• Advertising creates intangible (perceived) value.[watch here] [ads]

Brand NamesTop 10 Brands [see here] mentioned on Twitter [see here]

What top brands spend on advertisement • Microsoft – more than 20 percent of their annual revenue or $11.5 billion• Coca-Cola – more than $2.5 billion• Yahoo – more than 20 percent of their annual revenue or $1.3 billion• eBay – 14 percent to 15 percent of its revenue – which was $871 million, much of

that to advertise on Google• Google – In the millions rather than billions of dollars – with $188 million• Starbucks – $95 million

Big Pharma Spends More On Advertising Than Research And Development, Study Finds [source]

Is advertising good or bad?

• Galbraith vs Hayek

OligopolyCharacteristics (e.g. TV – Comcast, Viacom, Time Warner, Disney, Fox)

1. A few large sellers (in the case of two duopoly)

2. Homogeneous (e.g. bananas) or differentiated product (e.g. coffee)

3. Market power

4. Mutual interdependence

5. Barriers to entry

Examples• Airlines• Auto Industry• Steel/ Cement• Tobacco• Soft Drinks• Beer• Movie• TV (Media)• Book Publishing• Coffee/ Bananas• Cell Phones• Air Defense• Banking• Cereal• Oil

Duopoly

The Prisoner’s dilemma

CartelsExamples• OPEC• DeBeers• Caviar• NCAA• [milk]• [gas]

Problems

Pseudo-variety• Technique oligopolies use to capture bigger share of the market.

The way it works: flood the shelves with similar (quality) products but trivially differentiated.

• It gives the illusion of variety; yet, it makes real competition harder as new companies now compete with more products as theirs is less noticeable on the shelf. [Bud Ad] [ Bud Ad 2]

Is small beautiful…

• Or is bigger better?