Chapter 22 Monopolistic Competition, Oligopoly and Oligopolistic Competition

Characteristics of Monopolistic Competition Many firms Many firms Easy entry and exit Easy entry and exit Similar products – close substitutes Similar products – close substitutes Product differentiation Product differentiation Physical Physical Quality Quality Services and conditions Services and conditions Location Location Advertising, Product Image, Brand name and packaging Advertising, Product Image, Brand name and packaging Developing and improving the product Developing and improving the product Product Variety Product Variety Non-price competition Non-price competition Advertising (local radio, newspaper, and TV) Advertising (local radio, newspaper, and TV) Types Types Informational Informational Persuasive – increases the demand Persuasive – increases the demand Direct Marketing – telephone, post, Direct Marketing – telephone, post, Mass Marketing – TV, newspaper, radio, magazines Mass Marketing – TV, newspaper, radio, magazines Interactive Marketing – internet, sales booth Interactive Marketing – internet, sales booth Consumer follow up Consumer follow up Brand names and Trademarks Brand names and Trademarks Price Searcher Price Searcher Examples: stores in the mall and shopping centers Examples: stores in the mall and shopping centers

Model MR = MC MR = MC Profits in the short run, firms enter with a slightly different product Profits in the short run, firms enter with a slightly different product Long run – breakeven Long run – breakeven Demand saturation – satisfying the total demand for a product in an area Demand saturation – satisfying the total demand for a product in an area Explains the turnover rate among firms Explains the turnover rate among firms

Oligopoly Characteristics Few dominant large firms Few dominant large firms Difficult entry and exit Difficult entry and exit Barriers to entry Barriers to entry Large capital costs Large capital costs Economies of scale Economies of scale Large advertising budget Large advertising budget Brand loyalty Brand loyalty Much non-price competition (national TV and Magazines) Much non-price competition (national TV and Magazines) Firms are mutually interdependent – react to each other Firms are mutually interdependent – react to each other Differentiated product Differentiated product New and improved New and improved New models for cars New models for cars

Measures of Concentration Concentration ratio =sales of top 4/sales of the industry Concentration ratio =sales of top 4/sales of the industry Herfindahl Index = Sum of the squared market shares of each firm Herfindahl Index = Sum of the squared market shares of each firm

Price Determination Oligopoly Models Cartels and collusion -Firms agree to set prices and/or market share Cartels and collusion -Firms agree to set prices and/or market share OPEC OPEC llegal in the US llegal in the US Price Leadership - One firm sets the price and others follow Price Leadership - One firm sets the price and others follow Violates anti-trust laws Violates anti-trust laws Types Types Dominant - largest Dominant - largest Barometric - most knowledgeable and can react quickly to market changes Barometric - most knowledgeable and can react quickly to market changes Game theory – shows interdependence among firms Game theory – shows interdependence among firms Nash Equilibrium – A chooses the best decision based on the actions of B and B chooses the best decision based on the actions of A. There is no incentive to change Nash Equilibrium – A chooses the best decision based on the actions of B and B chooses the best decision based on the actions of A. There is no incentive to change

Kinked Demand Curve Firms follow price decrease but not an increase Firms follow price decrease but not an increase How is P set How is P set

Oligopolistic Competition Characteristics Characteristics Few dominant firms among many Few dominant firms among many Dominant firms are representatives of national chains Dominant firms are representatives of national chains Easy entry and exit Easy entry and exit Expensive non-price competition Expensive non-price competition local local national if corporate national if corporate Price leadership Price leadership Price Taker Price Taker Little price competition Little price competition Differentiated product Differentiated product Model Model Dominant firms obtain their price from the national headquarters Dominant firms obtain their price from the national headquarters Serve as price leaders Serve as price leaders Advertising and other firms entry & exit shifts the firm's demand curve Advertising and other firms entry & exit shifts the firm's demand curve All firms eventually breakeven All firms eventually breakeven