Monopolistic Competition and Oligopoly

Objectives Describe characteristics and give examples of monopolistic competition. Explain how firms compete without lowering prices. Describe characteristics and give examples of oligopoly.

What is monopolistic competition? Many companies compete to sell products that are similar but not identical. Example: The jean industry, soft drink industry, home appliances, etc.

Four Conditions of Monopolistic Competition Many firms Few artificial barriers to entry  No patents or copyrights Little control over price  Too many substitutes with lots of competition Differentiated products  Profiting from the fact that one product is different from other similar products

Non-Price Competition Physical characteristics Location Service level Advertising, image, or statusstatus

Four Conditions of Oligopoly Few firms (Suppliers produce 70% to 80% of all output) Many artificial barriers to entry  Government patents and copyrights Some control over price Some variety of goods

Cooperation and Collusion Oligopoly’s challenge to government:  Price leadership Price wars Harmful to producers but good for consumers  Collusion An agreement to divide the market, set prices, or limit production. Price fixing Illegal in the U.S.  Cartel A formal agreement or organization of producers to coordinate prices and production Illegal in the U.S.