Monopolistic Oligopoly

8/8/2019 Monopolistic Oligopoly

1/31

Monopolistic CompetitionMonopolistic Competitionand Oligopolyand Oligopoly

2003 South 2003 South--Western/Thomson LearningWestern/Thomson Learning


2/31

The Concept of ImperfectThe Concept of Imperfect

CompetitionCompetitionImperfect competition:Imperfect competition:market structuresmarket structures

between perfect competition and monopolybetween perfect competition and monopoly

more than one seller, but too few to createmore than one seller, but too few to create

a perfectly competitive marketa perfectly competitive market

often violate other conditions of perfectoften violate other conditions of perfect

competition, such as the requirement of acompetition, such as the requirement of a

standardized product or free entry and exitstandardized product or free entry and exit


3/31


4/31

Monopolistic CompetitionMonopolistic Competition

A monopolistically competitiveA monopolistically competitive

market has three fundamentalmarket has three fundamental

characteristics:characteristics:1. Many buyers and sellers1. Many buyers and sellers

2.2.No significant barriers to entry/exitNo significant barriers to entry/exit3.3.Differentiated productsDifferentiated products


5/31

Monopolistic CompetitionMonopolistic Competition

Because it produces a differentiatedBecause it produces a differentiated

product,product,

a monopolistic competitor faces aa monopolistic competitor faces a

downwarddownward--sloping demand curvesloping demand curve

when it raises its price a modest amount,when it raises its price a modest amount,

quantity demanded will declinequantity demanded will declinebut not all the way to zerobut not all the way to zero


6/31

Monopolistic Competition inMonopolistic Competition in

the Short Runthe Short Run

Under monopolistic competition,Under monopolistic competition,firms can earn positive orfirms can earn positive or

negative economic profit in thenegative economic profit in the

short run.short run.


7/31

Monopolistic Competition in the Short RunMonopolistic Competition in the Short Run

MR1

$70

30

Dollars

250 Homes Servicedper Month

d1

A MC

ATC


8/31


9/31


the Long Runthe Long RunIn long run, a monopolisticIn long run, a monopolistic

competitor will operate withcompetitor will operate withexcess capacityexcess capacity -- that is, it willthat is, it will

produce too little output toproduce too little output to

achieve minimum cost per unit.achieve minimum cost per unit.


10/31


the Long Runthe Long RunDollars

200 Homes Servicedper Month

MC

$40

100

d2MR2

ATC

d

E


11/31

Excess Capacity UnderExcess Capacity Under

Monopolistic CompetitionMonopolistic CompetitionIn the long run, a monopolisticIn the long run, a monopolistic

competitor will operate withcompetitor will operate withexcess capacity; it will produceexcess capacity; it will produce

too little output to achievetoo little output to achieve

minimum cost per unit.minimum cost per unit.


12/31

Nonprice CompetitionNonprice Competition

Nonprice CompetitionNonprice Competition

Any action a firm takes toAny action a firm takes to

increase the demand for itsincrease the demand for its

product, other than cutting itsproduct, other than cutting its

price.price.


13/31

OligopolyOligopoly

Oligopoly in the Real WorldOligopoly in the Real World

Why Oligopolies ExistWhy Oligopolies ExistOligopoly BehaviorOligopoly Behavior

Cooperative Behavior in OligopolyCooperative Behavior in OligopolyThe Limits of OligopolyThe Limits of Oligopoly


14/31

OligopolyOligopoly

OligopolyOligopoly

A market structure in whichA market structure in whicha small number of firms area small number of firms are

strategically interdependent.strategically interdependent.


15/31

Why Oligopolies ExistWhy Oligopolies Exist

Economies of scale: naturalEconomies of scale: natural

oligopoliesoligopolies

Reputation as a barrierReputation as a barrier

Strategic barriersStrategic barriers

GovernmentGovernment--created barrierscreated barriers


16/31


Minimum Efficient Scale (MES)Minimum Efficient Scale (MES)

The level of output at whichThe level of output at which

economies of scale are exhaustedeconomies of scale are exhaustedand minimum LRATC isand minimum LRATC is

achieved.achieved.


17/31



18/31

Oligopoly BehaviorOligopoly Behavior

Game TheoryGame Theory

An approach to modeling theAn approach to modeling thestrategic interaction ofstrategic interaction of

oligopolists in terms of moves andoligopolists in terms of moves and

countermovescountermoves


19/31


Payoff MatrixPayoff Matrix

A table showing the payoffs toA table showing the payoffs toeach of two players for eacheach of two players for each

pair of strategies they choosepair of strategies they choose


20/31


Confess Dont Confess

Confess

Dont

Confess

Roses

Actions

Colin

gets

20 years

Colin

gets

30 years

Colingets

3 years

Colingets

5 years

Rose

gets

20 years

Rose

gets

3 years

Rose

gets

30 years

Rose

gets

5 years

Colins Actions


21/31


Dominant StrategyDominant Strategy

A strategy that is best for aA strategy that is best for afirm no matter what strategyfirm no matter what strategy

its competitor choosesits competitor chooses


22/31


DuopolyDuopoly

An oligopoly market withAn oligopoly market withonly two sellersonly two sellers


23/31


Low Price High Price

Low

Price

High

Price

Filips

Guss

profit =

$25,000

Filips

profit =

$75,000

Guss Actions

Guss

profit =

$10,000

Gussprofit =

$50,000

Gussprofit =

$75,000

Filips

profit =

$25,000

Filips

profit =

$10,000

Filips

profit =

$50,000


24/31


RepeatedPlayRepeatedPlay

A situation in whichA situation in whichstrategically interdependentstrategically interdependent

sellers compete over manysellers compete over manytime periodstime periods


25/31

Cooperative Behavior inCooperative Behavior in

OligopolyOligopolyExplicit CollusionExplicit Collusion

Cooperation involving directCooperation involving directcommunication betweencommunication between

competing firms about settingcompeting firms about settingpricesprices


26/31


27/31


OligopolyOligopolyTacit CollusionTacit Collusion

Any form of oligopolisticAny form of oligopolisticcooperation that does notcooperation that does not

involve an explicit agreementinvolve an explicit agreement


28/31


OligopolyOligopolyPrice LeadershipPrice Leadership

A form of tacit collusion inA form of tacit collusion inwhich one firm sets a pricewhich one firm sets a price

that other firms copythat other firms copy


29/31


OligopolyOligopolyTit for TatTit for Tat

A gameA game--theoretic strategy oftheoretic strategy ofdoing to another player thisdoing to another player this

period what he has done toperiod what he has done toyou in the previous periodyou in the previous period


30/31

When Is Cheating Likely?When Is Cheating Likely?

Cheating will be likely, andCheating will be likely, and

collusion least successful, under thecollusion least successful, under the

following conditions:following conditions:Difficulty observing other firmsDifficulty observing other firms

pricesprices

Unstable market demandUnstable market demand

Large number of sellersLarge number of sellers


31/31

Monopolistic Oligopoly

Documents

Transcript of Monopolistic Oligopoly