GEOL 103 1nd Edition Lecture 22 Outline of Last 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 Outline of Current Lecture I II III IV V VI VII Introduction Determining Market Structure Determining Industry Structure Monopolistic Competition Output Price and Profit of a Monopolistic Competitor Strategic Pricing and Oligopoly Game Theory and Strategic Decision Making Current Lecture I II III Introduction a Market structure the physical characteristics of the market within which firms interact the number of firms in the market and the barriers to entry b Monopolistic Competition there are many firms selling differentiated products There are few barriers to entry c Oligopoly there are a few interdependent firms There are often significant barriers to entry and strategic decision making Determining Market Structure a Defining a market has problems i What is an industry and what is its geographic market local national or international ii What products are to be included in the definition of an industry b Using cross elasticity c Using North American Industry Classification System NAICS is a classification system of industries adopted by Canada Mexico and the U S in 1997 Determining Industry Structure 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 a Economists use i The concentration ratio 4 CR the value of sales by the top 4 firms of an industry stated as a percentage of total industry sales 1 Higher 4 CR closer to Monopoly 60 ii The Herfindahl index HI an index of market concentration calculated by adding the squared value of the individual market shares of all firms in the industry HI 1 000 merge allowed b Problems of using 4 CR and HI Conglomerates Monopolistic Competition a The four distinguishing characteristics of monopolistic competition are i Many sellers no collusion independent ii Differentiated products monopolistic power can influence price iii Multiple dimensions of competition differentiation matters What are the dimensions Physical service location image iv Easy entry of new firms Output Price and Profit of a Monopolistic Competitor a A monopolistically competitive firm prices in the same manner as a monopolistwhere MC MR SR profit is possible b But the monopolistic competitor is not only a monopolist but a competitor as well Strategic Pricing and Oligopoly a Both the cartel and contestable market models use strategic pricing decisionsfirms set their price based on the expected reactions of other firms Market entrance game Price matching policy b Price wars are the result of strategic pricing decisions gone wild c Predatory pricing strategy involves temporarily pushing the price down to drive a competitor out of business Game Theory and Strategic Decision Making a Most oligopolistic strategic decision making uses game theory b Game Theory is the application of economic principles to interdependent situations c The Prisoner s Dilemma demonstrates the difficulty of cooperative behavior in certain circumstances where mutual trust gets one out of the dilemma