Microeconomics Chapter 13: Monopolistic Competition and Oligopoly

relatively large number of sellers with small market shares; no collusion; independent of each other; PRODUCT DIFFERENTIATION

production differentiation in the way of subtle differences; benefits - wide range of types and styles, brands and quality variants

possible to analyze in a Monopolistic Competition

HIGHLY elastic, no perfect substitutes

not perfectly elastic; more elastic than the pure monopoly;

depends upon the number of rivals and the extent of product differentiation

Marginal Cost = Marginal Revenue; either economic profits or losses;

only get normal profits; price = average costs

Less economic efficient and more excess capacity

Not AE because output is smaller than the output at which MC=P; Not PE because output is less than the output when AC is minimum

firms produce less output than at the minimum of average total cost; many operate below optimal capacity

Price, product characteristics and advertising

few firms dominating and industry; strategic behavior - take actions of other firms into account; Mutual interdependence - oligopolies consider the reaction of rivals at any change in price,o output, product characteristic or advertising; occurs in internal growth or mergers

produces standardized product; steel

produces different type of consumer products; automobiles

economies of scale; control over raw materials; patents; pricing strategies

percentage of industry's total sales provided by the four largest firms; concentration is understated; substantial interindustry competition; import competition;

sum of the squared percentage of market shares

mutual interdependent; overt or covert collusion; collusion creates incentives to cheat by increasing production of decreasing prices

difficult because of mutual interdependence; inflexible prices and simultaneous price changes

no collusion; price is lowered, so rivals will lower price; however if prices are raised rivals will NOT raise prices; firms that collude set prices and joint output; collusion

overt collusion

covert collusion

Difference in demand; number of firms in arrangement; incentives to cheat; changing economic conditions; potential for entry by other firms; legal restrictions and penalties;

covert collusion in which a firm initiates price changes

happens when there is a need for a new price leader

Infrequent price adjustments; announces price change in various ways; many not maximize short-run profits

Oligopolies engage for price cuts and nonporous competition

Low-cost info to consumers; enhancing economic efficiency

manipulating customers to pay higher prices; barrier for entry; increase in product costs and prices

similar to monopoly;

Price > Marginal cost (Allocative Inefficient)

Price > Minimum Average Total Post (Productive Inefficient)