1. Monopolistic Competition and Oligopoly
© 2003 South-Western/Thomson Learning

2. The Concept of Imperfect Competition
Imperfect competition: market structures between perfect competition and monopoly
more than one seller, but too few to create a perfectly competitive market
often violate other conditions of perfect competition, such as the requirement of a standardized product or free entry and exit

3. Monopolistic Competition
Monopolistic Competition in the Short Run
Monopolistic Competition in the Long Run
Excess Capacity Under Monopolistic Competition
Nonprice Competition

4. Monopolistic Competition
A monopolistically competitive market has three fundamental characteristics:
1. Many buyers and sellers
2. No significant barriers to entry/exit
3. Differentiated products

5. Monopolistic Competition
Because it produces a differentiated product,
a monopolistic competitor faces a downward-sloping demand curve
when it raises its price a modest amount, quantity demanded will decline
but not all the way to zero

6. Monopolistic Competition in the Short Run
Under monopolistic competition, firms can earn positive or negative economic profit in the short run.

7. Monopolistic Competition in the Short RunMR 1
$70 30
Dollars
250
Homes Serviced
per Month d A MC
ATC

8. Monopolistic Competition in the Long Run
But in the long run, free entry and exit will ensure that each firm earns zero economic profit, just as under perfect competition.

9. Monopolistic Competition in the Long Run
In long run, a monopolistic competitor will operate with excess capacity - that is, it will produce too little output to achieve minimum cost per unit.

10. Monopolistic Competition in the Long Run
Dollars d MC
ATC d 2 MR 2 E
$40
100
200
Homes Serviced
per Month a a a

11. Excess Capacity Under Monopolistic Competition
In the long run, a monopolistic competitor will operate with excess capacity; it will produce too little output to achieve minimum cost per unit.

12. Non-price Competition
Any action a firm takes to increase the demand for its product, other than cutting its price.

13. Oligopoly Oligopoly in the Real World Why Oligopolies Exist
Oligopoly Behavior
Cooperative Behavior in Oligopoly
The Limits of Oligopoly

14. Oligopoly
Oligopoly
A market structure in which a small number of firms are strategically interdependent.

15. Why Oligopolies Exist Economies of scale: natural oligopolies
Reputation as a barrier
Strategic barriers
Government-created barriers

16. Minimum Efficient Scale (MES)
Why Oligopolies Exist
Minimum Efficient Scale (MES)
The level of output at which economies of scale are exhausted and minimum LRATC is achieved.

17. Why Oligopolies Exist

18. Oligopoly Behavior
Game Theory
An approach to modeling the strategic interaction of oligopolists in terms of moves and countermoves

19. Oligopoly Behavior
Payoff Matrix
A table showing the payoffs to each of two players for each pair of strategies they choose

20. Oligopoly Behavior Confess Don’t Confess Don’t Rose’s Actions Colin
gets
20 years
30 years
3 years
5 years
Rose
Colin’s Actions

21. Oligopoly Behavior
Dominant Strategy
A strategy that is best for a firm no matter what strategy its competitor chooses

22. An oligopoly market with only two sellers
Oligopoly Behavior
Duopoly
An oligopoly market with only two sellers

23. Oligopoly Behavior Low Price High Price Low Price High Filip’s Gus’s
profit =
$25,000
$75,000
Gus’s Actions
–$10,000
$50,000

24. Oligopoly Behavior
Repeated Play
A situation in which strategically interdependent sellers compete over many time periods

25. Cooperative Behavior in Oligopoly
Explicit Collusion
Cooperation involving direct communication between competing firms about setting prices

26. Cooperative Behavior in Oligopoly
Cartel
A group of firms that selects a common price that maximizes total industry profits

27. Cooperative Behavior in Oligopoly
Tacit Collusion
Any form of oligopolistic cooperation that does not involve an explicit agreement

28. Cooperative Behavior in Oligopoly
Price Leadership
A form of tacit collusion in which one firm sets a price that other firms copy

29. Cooperative Behavior in Oligopoly
Tit for Tat
A game-theoretic strategy of doing to another player this period what he has done to you in the previous period

30. When Is Cheating Likely?
Cheating will be likely, and collusion least successful, under the following conditions:
Difficulty observing other firms’ prices
Unstable market demand
Large number of sellers