Monopolistic Competition & Oligopoly Chapter 12 2/25/2019

Monopolistic Competition Relatively large # of sellers Some control over price Differentiated products often promoted by heavy advertising Easy entry & exit into or out of industry Monopolistic competition involves: small market shares, no collusion, & independent action (no feeling of interdependence) Firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of locational convenience, or proclaim special qualities (real or imagined) for their products 2/25/2019

Differentiated Products Variations of a particular product Slightly different characteristics Varying degrees of customer service Locational convenience Special qualities Brand names and packaging 2/25/2019

Advertising Firms in a monopolistically competitive industry advertise heavily. Goal Make price less of a factor in consumer purchases Make product differences a greater factor. 2/25/2019

The Short Run Profit – Maximizing Point MR=MC We’ve been through this before!!! 2/25/2019

The Long Run Firms will enter a profitable monopolistically competitive (mc) industry and leave an unprofitable one. 2/25/2019

Productive Efficiency The good is being produced in the least costly way. 2/25/2019

Allocative Efficiency The right amount of output is being produced and the right amount of society’s scarce resources is being devoted to this specific use. 2/25/2019

Excess Capacity The gap between the minimum ATC output and profit-maximizing output. Plant and equipment are underused because firms are producing less than the minimum ATC output. Add Figure 12.2 Page 233. 2/25/2019

Oligopoly Market dominated by a few large producers of a standard or differentiated product. Considerable control over prices Need to consider the reaction of their rivals to their own pricing, output, & advertising decisions. 2/25/2019

Mutual interdependence Each firm’s profit depends not only on its own price & sales strategies but also on those of its rivals. Firms are “price makers” just like monopoly. 2/25/2019

Mergers Some industries have developed into oligopolies through mergers. By merging, two or more firms may increase their market share. 2/25/2019

Concentration Ratio % of total output produced & sold by an industry’s largest firms. When the largest four firms in an industry control 40% or more of the market, it is considered an oligopoly. 2/25/2019

Import competition The concentration ratio does not account for import competition of foreign suppliers. Many of the world’s largest corporations are foreign and do business in the U.S. 2/25/2019

Interindustry competition Competition between two products associated with different industries. 2/25/2019

Game-Theory Model The study of how people behave in strategic situations. It’s important to study how your opponent runs their company. 2/25/2019

Pay-Off Matrix Each firm (McDonald’s & Burger King) has two possible pricing strategies. It also shows the profit that combination would earn for each firm. 2/25/2019

Collusion Cooperation with rivals. In order for each firm to make higher profits, they could collaborate as opposed to establish prices competitively or independently. 2/25/2019

Price War Successive and continuous rounds of price cuts by rivals as they attempt to maintain their market share. 2/25/2019

Price Leadership Implied understanding where oligopolists can coordinate prices without engaging in outright collusion A “dominant firm” initiates price changes and all other firms follow the leader. 2/25/2019

Cartel Group of producers that typically creates a formal written agreement specifying how much each member will produce & charge. 2/25/2019