1. Monopolistic Competition and Oligopoly
Chapter 12

2. Monopolistic Competition
Many firms, like pure competition
No barriers to entry
Product differentiation
Branding
Advertising
Firms’ products are poor substitutes
Firms have some market power over price
therefore face downward-sloping demand curves at the firm level
and downward-sloping MR curves

3. Chapter 25 Table 25.1

4. Short-run Profits under Monopolistic Competition
Chapter 25 Figure 25.1(a)
Short-run Profits under Monopolistic Competition

5. Short-run losses under Monopolistic Competition
Chapter 25 Figure 25.1(b)
Short-run losses under Monopolistic Competition

6. Long-run Equilibrium Reached through Firm Entry or Exit
Chapter 25 Figure 25.1(c)
Long-run Equilibrium Reached through Firm Entry or Exit

7. Long-run Inefficiency
Chapter 25 Figure 25.2
Long-run Inefficiency

8. Oligopoly Few large firms
Products may be either homogeneous or differentiated
Firms have market power but it’s limited by the impact of the other oligopolists
Strategic behavior
Mutual interdependence
Entry barriers

9. Quantifying Oligopoly
Concentration Ratio
= % industry output sold by n largest firms
e.g., n = 4
Herfindahl Index
= (%S1)2 + (%S2)2 + (%S3)2 +… + (%Sn)2
includes data on whole industry

10. Chapter 25 Table 25.2

11. Payoff Matrix for a Two-firm Oligopoly
Chapter 25 Figure 25.3
Payoff Matrix for a Two-firm Oligopoly

12. Chapter 25 Figure 25.4(a)
Kinky Demand

13. Discontinuous MR with Kinky Demand
Chapter 25 Figure 25.4(b)
Discontinuous MR with Kinky Demand

14. Incentive for Oligopolistic Collusion
Chapter 25 Figure 25.5
Incentive for Oligopolistic Collusion

15. Incentives to Cheat
Participation in a Cartel rewards Oligopolists with higher prices and profits
but colluding firms must reduce output to receive higher prices
The incentive to cheat:
Firms can earn even higher revenues and profits by selling a larger amount than they agreed
This benefits consumers
but harms the oligopoly partners in the cartel

16. Chapter 25 Table 25.3