Econ 103 Chapter 9

a. The relatively large number of sellers means that each has a small market share, there is no collusion, and firms take actions that are independent of each other.
b. Monopolistic competition exhibits product differentiation. This differentiation occurs through: differences in attributes or features of products; services to customers; location and accessibility; brand names and packaging; and some control over price.
c. Entry into the industry or exit is relatively easy.
d. There is nonprice competition in the form of product differentiation and advertising.
e. Monopolistically competitive firms are common, and examples include clothing stores, restaurants, and grocery stores.

equal and charge the price at which the output can be sold; either economic profits or losses may result in the short run.

the demand for the product of the individual firm in such a way that economic profits are eliminated and there are only normal profits.

a. The average cost of each firm is equal in the long run to its price. The industry does not realize allocative efficiency because output is smaller than the output at which marginal cost and price are equal. The industry does not re-alize productive efficiency because the output is less than the output at which average cost is a minimum.
b. Excess capacity results because firms produce less output than at the minimum of av-erage total cost. In monopolistic competition, many firms operate below optimal capacity.
c. The benefit of product variety is that firms offer consumers a wide range of types, style, brands, and quality variants of a product. Products can also be improved. The expanded range of consumer choice from product differentiation and improvement may offset some of the economic inefficiency (excess capacity problem) of monopolistic competition.

a. It is composed of a few firms that dominate an industry.
b. It may produce homogeneous or differenti-ated products.
c. Firms have control over price, and thus are price makers. Mutual interdependence exists because firms must consider the reaction of ri-vals to any change in price, output, product characteristic, or advertising.
d. Barriers to entry, such as economies of scale or ownership, control over raw materials, patents, and pricing strategies, can explain the existence of oligopoly.
e. Some industries have become oligopolistic not from internal growth but from external fac-tors such as mergers.

a. Firms in an oligopolistic industry are mutually interdependent and must consider the actions of rivals when they make price decisions.
b. Oligopoly often leads to overt or covert collusion among the firms to fix prices or to coordinate pricing because competition among oligopolists results in low prices and profits; collusion helps maintain higher prices and profits.
c. Collusion creates incentives to cheat among oligopolists by lowering prices or in-creasing production to obtain more profit

there is no collusion. Each firm believes that if it lowers its price its rivals will lower their prices, but if it raises its price its rivals will not increase their prices. Therefore the firm is reluctant to change its price for fear of reducing its profits.

occurs when one firm initiates price changes and the other firms in the industry follow the lead. Three price leadership tactics have been observed.
(1) Price adjustments tend to be made infre-quently, only when cost and demand conditions change to a significant degree.
(2) The price leader announces the price change in various ways, through speeches, an-nouncements, or other such activities.
(3) The price leader seeks to avoid a price war.

a. Firms that collude tend to set their prices and joint output at the same level a pure mo-nopolist would set them.
b. Applying the Analysis (Cartels and Collu-sion). Collusion may be overt, as in a cartel agreement. The OPEC cartel is an example of effective overt collusion. Collusion may be covert whereby agreements or tacit understand-ings between firms set price or market share. Examples of such collusion have included bid rigging on milk prices for schools or fixing worldwide prices for a livestock feed additive.
c. At least six obstacles make it difficult for firms to collude or maintain collusive arrange-ments: difference in demand and cost among firms, the number of firms in the arrangement, incentives to cheat, changing economic condi-tions, potential for entry by other firms, and legal restrictions and penalties.

Price cuts are easily duplicated, but nonprice competition is more unique; and firms have more financial resources for advertising and product development.
a. The potential positive effects of advertising include providing low-cost information to con-sumers that reduces search time and monopoly power, thus enhancing economic efficiency.
b. The potential negative effects of advertising include manipulating consumers to pay higher prices, serving as a barrier to entry into an industry, and offsetting campaigns that raise product costs and prices.

a. Many economists think that oligopoly price and output characteristics are similar to those of monopoly. Oligopoly firms set output where price exceeds marginal cost and the minimum of average total cost. Oligopoly is allocatively inefficient (P > MC) and productively inefficient (P > minimum ATC).
b. This view must be qualified because of in-creased foreign competition to domestic firms in oligopolistic industries, the use of limit pricing that sets prices at less than the profit-maximizing price, and the technological ad-vances arising from this market structure.