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Copyright 2008 The McGraw-Hill Companies 23-1 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show 23 Monopolistic Competition and Oligopoly

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Copyright 2008 The McGraw-Hill Companies 23-2 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Chapter Objectives Characteristics of Monopolistic Competition Why Monopolistic Competitors Earn Only a Normal Profit in the Long-Run Characteristics of Oligopoly How Game Theory Relates to Oligopoly Why the Demand Curve of the Oligopolist May Be Kinked Incentives and Obstacles to Collusion Among Oligopolists Potential Positive and Negative Effects of Advertising

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Copyright 2008 The McGraw-Hill Companies 23-3 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Monopolistic Competition Characteristics –Small Market Shares –No Collusion –Independent Action Differentiated Products –Product Attributes –Service –Location –Brand Names and Packaging –Some Control Over Price O 23.1

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Copyright 2008 The McGraw-Hill Companies 23-4 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Monopolistic Competition Easy Entry and Exit Advertising –Nonprice Competition Monopolistically Competitive Industries O 23.1

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Copyright 2008 The McGraw-Hill Companies 23-5 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price and Output Determination The Firms Demand Curve The Short Run: –Profit or Loss The Long Run: –Only a Normal Profit –Profits: Firms Enter –Losses: Firms Leave Complications –Product Variety In Monopolistic Competition G 23.1

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Copyright 2008 The McGraw-Hill Companies 23-6 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price and Output Determination In Monopolistic Competition Short-Run Profits Quantity Price and Costs MR = MC MC MR D1D1 ATC Economic Profit Q1Q1 A1A1 P1P1 0

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Copyright 2008 The McGraw-Hill Companies 23-7 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price and Output Determination In Monopolistic Competition Short-Run Losses Quantity Price and Costs MR = MC MC MR D2D2 ATC Loss Q2Q2 A2A2 P2P2 0

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Copyright 2008 The McGraw-Hill Companies 23-8 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price and Output Determination In Monopolistic Competition Long-Run Equilibrium Quantity Price and Costs MR = MC MC MR D3D3 ATC Q3Q3 P3=A3P3=A3 0

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Copyright 2008 The McGraw-Hill Companies 23-9 Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Quantity Price and Costs MR = MC MC MR D3D3 ATC Q3Q3 P3=A3P3=A3 0 Monopolistic Competition and Efficiency Recall: P=MC=Minimum ATC P4P4 Q4Q4 Price is Higher Excess Capacity at Minimum ATC Monopolistic Competition is Not Efficient

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Oligopoly Characteristics –A Few Large Producers –Homogeneous or Differentiated Products Homogeneous Oligopoly Differentiated Oligopoly –Control Over Price, But Mutual Interdependence Strategic Behavior –Entry Barriers –Mergers

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Measures of Concentration Concentration Ratio Localized Markets Interindustry Competition World Trade –Import Competition Herfindahl Index (%S 1 ) 2 + (%S 2 ) 2 + (%S 3 ) 2 + … + (%S n ) 2 W 23.1

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Game Theory Game Theory Model to Analyze Behavior RareAirs Price Strategy Uptowns Price Strategy AB CD $12 $15 $6 $8 $6 $15 High Low 2 Competitors 2 Price Strategies Each Strategy Has a Payoff Matrix Greatest Combined Profit Independent Actions Stimulate a Response O 23.2

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Game Theory Game Theory Model to Analyze Behavior RareAirs Price Strategy Uptowns Price Strategy AB CD $12 $15 $6 $8 $6 $15 High Low Independently Lowered Prices in Expectation of Greater Profit Leads to the Worst Combined Outcome Eventually Low Outcomes Make Firms Return to Higher Prices O 23.2

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Game Theory Role of Mutual Interdependence Collusive Tendencies –Collusion Incentive to Cheat G 23.2

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Three Oligopoly Models Kinked Demand Curve Collusive Pricing Price Leadership Diversity of Oligopolies Complications of Interdependence

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Kinked-Demand Curve Strategies –Match Price Changes –Ignore Price Changes A Combined Strategy Price Inflexibility The Kinked-Demand Curve Graphically… Noncollusive Oligopoly

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price Price and Costs Quantity 0 0 Kinked-Demand Curve Noncollusive Oligopoly P0P0 MR 2 D2D2 D1D1 MR 1 e f g Rivals Ignore Price Increase Rivals Match Price Decrease Q0Q0 Competitor and Rivals Strategize Versus Each Other Consumers Effectively Have 2 Partial Demand Curves and Each Part Has Its Own Marginal Revenue Part MR 2 D2D2 D1D1 MR 1 Q0Q0 MC 1 MC 2 P0P0 Resulting in a Kinked-Demand Curve to the Consumer – Price and Output Are Optimized at the Kink e f g

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Kinked-Demand Curve Noncollusive Oligopoly Criticisms of the Model –Doesnt Explain How Price Gets to the Kink (P 0 ) –Oligopoly Prices Are Not As Rigid During Instability as the Model Indicates –Possibility of Price Wars

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price and Costs Quantity Cartels and Other Collusion Price and Output –Collusion and Tendency Toward Joint-Profit Maximization D MR=MC ATC MC MR P0P0 A0A0 Q0Q0 Economic Profit Effectively Sharing The Monopoly Profit

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Cartels and Other Collusion Overt Collusion –Cartels –The OPEC Cartel GLOBAL PERSPECTIVE The 11 OPEC Nations Daily Oil Production, May 2006 Saudi Arabia Iran Venezuela UAE Nigeria Kuwait Iraq Libya Indonesia Algeria Qatar Source: OPEC Country Barrels of Oil 9,099,000 4,110,000 3,233,000 2,444,000 2,306,000 2,247,000 1,903,000 1,500,000 1,451, , ,000

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Cartels and Other Collusion Covert Collusion –Tacit Understandings Obstacles to Collusion –Demand and Cost Differences –Number of Firms –Cheating –Recession –Potential Entry –Legal Obstacles: Antitrust Law

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Price Leadership Model Leadership Tactics Infrequent Price Changes Communications Limit Pricing Breakdowns in Price Leadership: –Price Wars

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Oligopoly and Advertising Advertising Prevalent in Monopolistic Competition and Oligopoly Positive Effects of Advertising Potential Negative Effects of Advertising

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Oligopoly and Advertising The Largest U.S. Advertisers, 2005 Company Advertising Spending Millions of $ Proctor and Gamble General Motors Time Warner Verizon AT&T Ford Motor Walt Disney Johnson & Johnson GlaxoSmithKline DaimlerChrysler $ Source: Advertising Age

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Oligopoly and Advertising Worlds Top 10 Brand Names GLOBAL PERSPECTIVE Source: Interbrand Coca-Cola Microsoft IBM General Electric Intel Nokia Toyota Disney McDonalds Mercedes-Benz

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Oligopoly and Efficiency Productive and Allocative Efficiency P = MC = Minimum ATC – Neither Exists Tendency to Share the Monopoly Profit Qualifications –Increased Foreign Competition –Limit Pricing –Technological Advance

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Oligopoly in the Beer Industry Once Hundreds of Firms Now a Very Small Group Demand Side Changes –Taste Shifts to Lighter Beers of Large Breweries –Shift From Tavern-Tap Consumption to Can or Bottles Supply Side Changes –Technology Increased Minimum Efficient Scale Creating a Barrier to Entry –National Brands Enjoy Cost Advantages Consolidation of Firms into Oligopoly Last Word

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Key Terms monopolistic competitionmonopolistic competition product differentiationproduct differentiation nonprice competitionnonprice competition excess capacity oligopoly homogeneous oligopolyhomogeneous oligopoly differentiated oligopolydifferentiated oligopoly strategic behavior mutual interdependencemutual interdependence concentration ratio interindustry competitioninterindustry competition import competition Herfindahl index game-theory model collusion kinked-demand curvekinked-demand curve price war cartel tacit understandingstacit understandings price leadership

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Copyright 2008 The McGraw-Hill Companies Monopolistic Competition Monopolistic Competition and Efficiency Oligopoly Game Theory Three Oligopoly Models Kinked Demand Curve Cartels and Other Collusion Price Leadership Model Oligopoly and Efficiency Last Word Key Terms End Show Next Chapter Preview… Technology, R&D, And Efficiency

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