Slide 1Monopolistic Competition And OligopolyThe Concept of Imperfect CompetitionMonopolistic CompetitionMany Buyers and SellersSellers Offer a Differentiated ProductSlide 7Easy Entry and ExitMonopolistic Competition in the Short-RunA Monopolistically Competitive Firm in the Short RunMonopolistic Competition in the Long-RunA Monopolistically Competitive Firm in the Long RunExcess Capacity Under Monopolistic CompetitionNonprice CompetitionOligopolyMarket DefinitionNumber of FirmsMarket DominationEconomies of Scale: Natural OligopoliesReputation as a BarrierStrategic BarriersLegal BarriersOligopoly vs. Other Market StructuresThe Game Theory ApproachThe Prisoner’s DilemmaSlide 26Slide 27Simple Oligopoly GamesA Duopoly GameOligopoly Games in the Real WorldSlide 31Cooperative Behavior in OligopolyExplicit CollusionTacit CollusionSlide 35The Limits to CollusionThe Incentive to CheatWhen is Cheating Likely?The Future of OligopolyAntitrust Legislation and EnforcementThe Globalization of MarketsTechnological ChangeAdvertising in Monopolistic CompetitionUsing the Theory: Advertising in Monopolistic Competition and OligopolyUsing the Theory: Advertising and Market Equilibrium Under Monopolistic CompetitionSlide 46Advertising and Collusion in OligopolyAn Advertising GameThe Four Market Structures: A PostscriptLecture by: Jacinto FabiosaFall 2005Monopolistic Competition And Oligopoly2Monopolistic Competition And Oligopoly•On any given day, you are probably exposed to hundreds of advertisements–Advertising is everywhere in the economy•So far in this book not much has been said about advertising–There is a good reason for this•In perfect competition and monopoly firms do little, if any, advertising•Where, then, is all the advertising coming from?–We must consider firms that are neither perfect competitors nor monopolists3The Concept of Imperfect Competition•Refers to market structures between perfect competition and monopoly–In imperfectly competitive markets, there is more than one seller, but too few to create a perfectly competitive market–Imperfectly competitive markets often violate other conditions of perfect competition•Such as the requirement of a standardized product or free entry and exit•Types of imperfectly competitive markets–Monopolistic competition –Oligopoly4Monopolistic Competition•Hybrid of perfect competition and monopoly, sharing some of features of each–A monopolistically competitive market has three fundamental characteristics•Many buyers and sellers•Sellers offer a differentiated product•Sellers can easily enter or exit the market5Many Buyers and Sellers•Under monopolistic competition, an individual buyer is unable to influence price he pays–But an individual seller, in spite of having many competitors, decides what price to charge•Our assumption of many sellers, however, has another purpose–To ensure that no strategic games will be played among firms in market•There are so many firms, each supplying such a small part of the market–That no one of them needs to worry that its actions will be noticed—and reacted to—by others6Sellers Offer a Differentiated Product•Each seller produces a somewhat different product from the others•Faces a downward-sloping demand curve –In this sense is more like a monopolist than a perfect competitor–When it raises its price a modest amount, quantity demanded will decline (but not all the way to zero)7Sellers Offer a Differentiated Product•What makes a product differentiated?–Quality of product–Difference in location•Product differentiation is a subjective matter–A product is different whenever people think that it is•Whether their perception is accurate or not•Thus, whenever a firm (that is not a monopoly) faces a downward-sloping demand curve, we know buyers perceive its product as differentiated–This perception may be real or illusory, but economic implications are the same in either case•Firm chooses its price8Easy Entry and Exit•This feature is shared by monopolistic competition and perfect competition–Plays the same role in both–Ensures firms earn zero economic profit in long-run•In monopolistic competition, however, assumption about easy entry goes further–No barrier stops any firm from copying the successful business of other firms9Monopolistic Competition in the Short-Run•Individual monopolistic competitor behaves very much like a monopoly•Key difference is this–While a monopoly is the only seller in its market, a monopolistic competitor is one of many sellers–When a monopolistic competitor raises its price, its customers have one additional option•Can buy similar good from some other firm10A Monopolistically Competitive Firm in the Short Run11Monopolistic Competition in the Long-Run•Under monopolistic competition—in which there are no barriers to entry and exit—the firm will not enjoy its profit for long–Entry will continue to occur, and demand curve will continue to shift leftward•Under monopolistic competition, firms can earn positive or negative economic profit in short-run–But in long-run, free entry and exit will ensure that each firm earns zero economic profit just as under perfect competition•In real world, monopolistic competitors often earn economic profit or loss in the short-run–But—given enough time—profits attract new entrants, and losses result in an industry shakeout•Until firms are earning zero economic profit12A Monopolistically Competitive Firm in the Long Run13Excess Capacity Under Monopolistic Competition•In long-run, a monopolistic competitor will operate with excess capacity–Will produce too little output to achieve minimum cost per unit•Excess capacity suggests that monopolistic competition is costly to consumers•May tempt you to leap to a conclusion–Consumers are better off under perfect competition; however•In order to get beneficial results of perfect competition, all firms must produce identical output•Consumers usually benefit from product differentiation14Nonprice Competition•If monopolistic competitor wants to increase its output it can cut its price–Move along its demand curve•Any action a firm takes to increase demand for its output—other than cutting its price—is called nonprice competition–Examples include better service, product guarantees, free home delivery, more attractive packaging •Nonprice competition is another reason why monopolistic
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