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12 - 1 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Monopolistic Competition and Oligopoly Monopolistic Competition and Oligopoly Superior Cheese 12 C H A P T E R

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12 - 2 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Monopolistic Competition: Relatively Large Number of Sellers Differentiated Products Easy Entry and Exit

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12 - 3 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show CHARACTERISTICS Relatively Large Number of Sellers Small Market Shares No Collusion Independent Action

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12 - 4 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Differentiated Products Product Attributes Service Location Brand Names and Packaging Some Control Over Price Easy Entry and Exit Advertising CHARACTERISTICS

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12 - 5 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D MR P1P1 ATC Price and Costs Q1Q1 Short-Run Economic Profits Expect New Competitors PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A1A1 MC

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12 - 6 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D MR P1P1 ATC Price and Costs Q1Q1 Expect New Competitors PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A1A1 New competition drives down the price level – leading to economic losses in the short run. MC Short-Run Economic Profits

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12 - 7 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D MR MC P2P2 ATC Price and Costs Q2Q2 Short-Run Economic Losses PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A2A2

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12 - 8 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Short-Run Economic Losses D MR MC P2P2 ATC Price and Costs Q2Q2 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity A2A2 With economic losses, firms will exit the market – stability occurs when economic profits are zero.

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12 - 9 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D MR MC P 3 = A 3 ATC Price and Costs Q3Q3 PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Quantity Long-Run Equilibrium Normal Profit Only

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12 - 10 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show MONOPOLISTIC COMPETITION AND EFFICIENCY Not Productively Efficient Minimum ATC Not Allocatively Efficient Price MC Excess Capacity Graphically…

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12 - 11 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D MR MC P 3 = A 3 ATC Price and Costs Q3Q3 Quantity Long-Run Equilibrium Price is Not = Minimum ATC Price MC MONOPOLISTIC COMPETITION AND EFFICIENCY

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12 - 12 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show MONOPOLISTIC COMPETITION AND EFFICIENCY Product Variety Benefits of Product Variety Nonprice Competition Advertising Role Trial & Error Search for Maximum Profits

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12 - 13 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Oligopoly: A Few Large Producers Homogeneous or Differentiated Products Control Over Price, But Mutual Interdependence Strategic Behavior Entry Barriers

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12 - 14 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLIES AND MERGERS Mergers Measures of Industry Concentration Concentration Ratio Localized Markets Interindustry Competition World Trade Import Competition

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12 - 15 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLIES AND MERGERS Herfindahl Index Sum of the squared percentage market shares for all firms in the industry – Places greater weight upon the larger firms (%S 1 ) 2 + (%S 2 ) 2 + (%S 3 ) 2 + … + (%S n ) 2 A greater Herfindahl Index indicates a greater concentration of market power in the industry. (Pure competition is near zero.)

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12 - 16 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLIES AND MERGERS Mutual Interdependence Game-Theory Model Collusive Tendencies Collusion Incentive to Cheat Introduction to Game Theory…

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12 - 17 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15

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12 - 18 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Greatest Combined Profit

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12 - 19 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Independent Actions Stimulate Response

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12 - 20 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Independent Actions Stimulate Response Gravitating to the Worst Case

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12 - 21 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Collusion Invites a Different Solution

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12 - 22 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 Collusion Invites a Different Solution

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12 - 23 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY BEHAVIOR A Game-Theory Overview High Low HighLow Uptowns Price Strategy RareAirs Price Strategy B A D C $12$15 $12$6 $8 $15 But, the incentive to cheat is very real Collusion Invites a Different Solution

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12 - 24 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show No Standard Model due to... Diversity of Oligopolies Complications of Interdependence 1 – Kinked Demand Curve 2 – Cartels and Collusion 3 – Price Leadership THREE OLIGOPOLY MODELS Alternative Models:

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12 - 25 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D1D1 MR 1 Quantity The firms demand and marginal revenue curves KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price

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12 - 26 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show MR 2 D1D1 D2D2 MR 1 Quantity The rivals demand and marginal revenue curves KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price

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12 - 27 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show MR 2 D1D1 D2D2 MR 1 Quantity KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price Rivals tend to follow a price cut

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12 - 28 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show MR 2 D1D1 D2D2 MR 1 Quantity KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price Rivals tend to follow a price cut or ignore a price increase

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12 - 29 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show MR 2 D1D1 D2D2 MR 1 Quantity Effectively creating a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price

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12 - 30 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D Quantity Effectively creating a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price

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12 - 31 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D MR 1 Quantity Effectively creating a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MC 2 MC 1 MR 2

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12 - 32 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D Quantity Profit maximization MR = MC occurs at the kink KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MC 2 MC 1 MR 2 MR 1

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12 - 33 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show D Quantity This behavior can set off a price war. KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Price MC 2 MC 1 MR 2 MR 1

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12 - 34 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show If a few firms face identical or highly similar demand and costs... Oligopoly is conducive to collusion. they will tend to seek joint profit maximization. CARTELS AND OTHER COLLUSION Graphically…

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12 - 35 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Colluding Oligopolists Will Split the Monopoly Profits D MC ATC MR Economic Profit MR = MC Price and costs Q0Q0 P0P0 A0A0 CARTELS AND OTHER COLLUSION

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12 - 36 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Overt Collusion Cartels Defined The OPEC Cartel Covert Collusion Recent Examples U.S. Illegality Tacit Understandings CARTELS AND OTHER COLLUSION

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12 - 37 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Obstacles to Collusion Demand and Cost Differences Number of Firms Cheating Recession Potential Entry Antitrust Law CARTELS AND OTHER COLLUSION

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12 - 38 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show PRICE LEADERSHIP MODEL Leadership Tactics Infrequent Price Changes Communications Limit Pricing Breakdowns in Price Leadership-Price Wars

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12 - 39 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY AND ADVERTISING Less Easily Duplicated Adequate Resources Positive Effects of Advertising Potential Negative Effects of Advertising Brand Development

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12 - 40 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show OLIGOPOLY AND EFFICIENCY Productive Efficiency P = Minimum ATC Allocative Efficiency P = MC Oligopoly: No Productive Efficiency Oligopoly: No Allocative Efficiency Qualifications

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monopolistic competition product differentiation nonprice competition excess capacity oligopoly homogeneous oligopoly differentiated oligopoly strategic behavior mutual interdependence concentration ratio interindustry competition import competition Herfindahl index game-theory model collusion kinked-demand curve price war cartel tacit understandings price leadership ENDBACK Copyright McGraw-Hill/Irwin, 2005

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12 - 42 Copyright McGraw-Hill/Irwin, 2005 Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide Next Slide End Show Next... Chapter 13 Technology, R&D, and Efficiency

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