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OU ECON 1123 - Lecture 22: Monopolistic Competition and Intro to Oligopoly

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ECON 1123 1st Edition Lecture 22 Outline From Previous Lecture (Lecture 21)I. Characteristics of Monopolistic CompetitionII. BrandsIII. Persuasive AdvertisingIV. Comparison between monopolistic competitive firms and perfectly competitive firmsOutline of Current Lecture 22I. Monopolistic CompetitionA) Short Run Economic ProfitsB) Long Run Zero Economic ProfitsC) Monopolistic Versus Pure CompetitionII. OligopolyA) DefinitionB) CartelC) Price Leadership/Dominant Firm/Competitive FringeLecture 22 NotesI. Monopolistic CompetitionA) Short Run Economic ProfitsFor monopolistic competition you still compare the price to the average total cost to find profitablitiy. The major difference is the more elastic demand schedule. B) Long Run Zero Economic ProfitsATC will be tangent to the demand schedule. In the long run, Pmc=ATC will give zero economic profitsD) Monopolistic Versus Pure CompetitionPure competition, price=marginal cost, economic efficiency Monopolistic competition, price>marginal cost, economic inefficiencyPure competition in the long run, production is at minimum average total costsIn monopolistic competition, production is at a point higher than minimum ATC.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Higher average costs are incurred by producing a variety of differentiated products.II. OligopolyA) DefinitionOligopoly- A market with a few firms dominating the industry1. Each firm must consider its competitors reactions when making its own decisions (mutual interdependence) 2. Significant barriers to entry (government regulations like patents and licenses, start up costs (capital barrier), economies of scale, product differentiation, access to suppliers distribution networks)B) CartelCartel like OPEC (organization of petroleum exporting countries)Cartel- An agreement between firms (or countries) in an industry to formally collude on price and output, then agree on distribution of production (output quotas)Cartels are inherently unstable because individual firms (or countries) can earn higher profits by selling more than their production quota. As more firms “cheat”on the quota agreements prices fall and the cartel fallsCartels stability is enhanced by:1.fewer members with similar goals2. non price competition is very difficult (better service)Price leadership model1. One very large (relative to market) firm—Gas Prom (Russian Firm-Natural Gas) and other smaller firms (fringe)2. The dominant firm establishes the market price and all the other firms chargethe same price.The dominant firm establishes price where its marginal revenue=marginal cost.The competitive fringe can effectively sell as much as they like at the dominant firm priceGame theory- uses mathematical analysis to model oligopolistic mutual interdependenceC) Price Leadership/Dominant Firm/Competitive


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