ECON 201 1nd Edition Lecture 21 Outline of Last Lecture I Introduction II Determining Market Structure III Monopolistic Competition IV Output price and profit of a monopolistic competitor Outline of Current Lecture I Comparing Perfect and Monopolistic Competition II Comparing monopolistic competition with monopoly Mono III Characteristics on Oligopoly IV Models of Oligopoly Behavior V Cartel Models VI The Contestable Market Model VII Comparing the contestable market and cartel models Current Lecture I II III Comparing Perfect and Monopolistic Competition a Both make zero economic profit in the long run b P C demand curve is perfectly elastic Zero economic profit means that it produces at the minimum of the ATC curve c A M C faces a downward sloping demand curve and produces where MC MR ATC curve is tangent to the demand curve at that level which is not at the minimum point of the ATC curve Why Differentiation excess capacity 22 000 funeral homes could handle 4 million but only 2 4 million die d Market share matters for M C Comparing monopolistic competition with monopoly Mono a It is possible for Mono to make economic profit in the long run b No long run economic profit is possible in M C c Advertising forms in P C Market have no incentive to advertise d M C have a strong incentive to do so it will increase the demand make it inelastic But it will increase ATC Characteristics on Oligopoly a Oligopolies are made up of a small number of mutually interdependent firms b Each firm must take into account the expected reaction of other firms c There is a strong barrier to entry 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 IV V VI VII d Example Digital TV and broadcast Sega s dreamcast Models of Oligopoly Behavior a Cartel i It is a combination of firms that acts as if it were a single firm It is a shared monopoly ii The oligopoly sets a monopoly Price iii Increase profit but need to limit entry iv How assign outputs quotas total product is maximizing joint profit Cartel Models a Formal collusion is illegal Use Implicit price collusion mutiple firms make the same pricing decisions even though they have not consulted with one another b Example Price Leader in Airline OPEC c It can be destroyed with new technology They invest in R D The Contestable Market Model a According to the contestable market model barriers to entry and barriers to exit determine a firm s price and output decisions i Even if the industry contains only one firm it could still be a competitive market if entry is open b An oligopoly with no barriers to entry set a competitive price Comparing the contestable market and cartel models a The stronger the ability of oligopolists to collude and present market entry the closer it is to a monopolistic situation b The weaker the ability to collude is the more competitive it is c Oligopoly markets lie between these two extremes