1. Chapter 7: Market Structures Section 3

2. Objectives
Describe characteristics and give examples of monopolistic competition.
Explain how firms compete without lowering prices.
Understand how firms in a monopolistically competitive market set output.
Describe characteristics and give examples of oligopoly.

3. Key Terms
monopolistic competition: a market structure in which many companies sell products that are similar but not identical
differentiation: making a product different from other, similar products
nonprice competition: a way to attract customers through style, service, or location, but not a lower price
oligopoly: a market structure in which a few large firms dominate a market
price war: a series of competitive price cuts that lowers the market price below the cost of production
collusion: an illegal agreement among firms to divide the market, set prices, or limit production – 2 companies gang up on another
price fixing: an agreement among firms to charge one price for the same good in order to inflate prices
cartel: a formal organization of producers that agree to coordinate prices and production in order to raise prices

4. Introduction What are the characteristics of an oligopoly?
What are the characteristics of monopolistic competition?
Monopolistic Competition
Many firms in the market
Some variety of goods
Minimal barriers to entry
Little control over prices
What are the characteristics of an oligopoly?
Oligopoly
Few firms in the market
Many barriers to entry
Some control over prices

5. Monopolistic Competition
In monopolistic competition, many companies compete in an open market to sell similar, but not identical, products.
Common examples or monopolistically competitive firms are:
Fast Food Restaurants
Gas stations
Retail stores
Jeans
The market for jeans is monopolistically competitive because jeans can vary by size, color, style, and designer.

6. Monopolistic Competition Conditions
Many Firms
Low start-up costs allow many firms to enter the market.
Few barriers to entry
It is easy for new firms to enter the market.
Little control over price
If a firm raises their prices too high, consumers will go elsewhere to buy the product.
Differentiated products
Allows a firm to profit from the differences between their product and a competitor’s product.

7. Nonprice Competition
In a monopolistically competitive market, non-price competition plays a big role.
Advertising is CRITICAL
Explain differences
Educate customers
Justify price

8. Prices, Output, Profits
Monopolistic Competition vs Perfect Competition
Prices
Prices are higher under MC than PC, but MC demand curves are more elastic (flatter) because customers many substitutes to choose from.
Output
Monopolistic competition output (# jobs) falls somewhere between that of a monopoly (least) and that of perfect competition (most).
Profits
Monopolistic competition firms earn more profits than PC
Competition is very tough, reducing profits over time, causing some firms to leave the industry.

9. Oligopoly
Oligopoly describes a market dominated by a few, profitable firms.
Economies of Scale
Gives pricing advantage
Requires large infrastructure
Control over prices (some):
Firms follow the “LEADER”
Products are VERY similar
Perceived differences
Answers: 1. Because it keeps the numbers of firms in the market at a minimum. 2. Because there are high barriers to entry.

10. Barriers to Entry Barriers to Entry
Expensive start up costs
Intense Competition
Customer Loyalty
Technology can also be a barrier to entry
Costs of hardware/software are expensive
Skills can be limited
Other barriers to entry:
Government licenses or patents requirements
Government limits on number of firms

11. Cooperation, Collusion, and Cartels
There are three practices that concern government regarding oligopolies.
Price leadership: This can lead to price wars when companies in an oligopoly disagree
Collusion: This leads to price fixing and is illegal in the United States
Cartels: By coordinating prices and production, cartels offer its members strong incentives to produce more than its quota, which leads to falling prices.

12. Cooperation, Collusion, and Cartels
EXAMPLES:
Price leadership: Airlines: IF Delta raises its prices, then all other airlines would follow.
Collusion: IF DishTV and DirectTV agreed to lower prices in order to hurt Comcast
Cartels: Oil producers coordinate oil production and prices in order to take raise prices of customers.