1. Unit 3 Microeconomics: Prices and Markets
Chapters 7.3
Economics
Mr. Biggs

2. Monopolist Competition
and Oligopoly
Perfect competition and monopoly are two extreme market structures and very few markets fall into these categories.
Most markets fall into the following two categories:
Monopolistic competition
Oligopoly

3. Monopolist Competition
Monopolist competition - A market structure in which many companies sell products that are similar but not identical.
Prices will be higher than in perfect competition.
For example, Jeans are all denim pants, but they are different enough to provide competition.
Four Conditions of Monopolistic Competition
Many firms
Few artificial barriers to entry
Slight control over price
Differentiated products
Differentiation - Making a product different from other similar products.

4. Nonprice Competition
Nonprice competition - A way to attract customers through style, service, or locations but not a lower price.
Nonprice competition takes several different forms:
Physical characteristics
New size, color, shape, texture, or taste
Location
Home location or gas station in the desert
Service level
High level of service
Advertising, image, or status
Designer hand bags

5. Price, Outputs, and Profits
Monopolistic competition looks very much as it would under perfect competition.
Price
Monopolistic competition prices will be higher than perfect competition prices, but lower than monopoly prices.
Output
Total output under monopolistic competition falls between perfect competition and monopoly.
Profit
Monopolistically competitive firms can earn profits in the short run, but they have to work hard to keep their products distinct to stay ahead of their rivals.
Production Costs and Variety
Monopolistically competitive firms provide a large variety of goods, but not at the lowest cost.

6. Oligopoly Barriers to Entry
Oligopoly - A market structure in which a few large firms dominate the market.
If the four largest firms produce 70-80% of the market output, then it is an oligopoly market.
The biggest firms in an oligopoly may set prices higher and output lower than in a perfectly competitive market.
For example, breakfast cereals, air travel, and household appliances.
Barriers to Entry
Lack of license or patent, high start up costs, economy of scale, or competition with larger companies are all barriers to entry.

7. Cooperation and Collusion
Oligopolies often seem to engage in collusion, even if its not true.
Three practices that concern governments are:
Price leadership can be started when a market leader makes its pricing plans clear to the other firms.
Price war - A series of competitive price cuts that lowers the market price below the cost of production.
Collusion - An agreement among firms to divide the market, set price, or limit production.
Price fixing - One outcome of collusion which is an agreement among firms to charge one price for the same good.

8. Cartels
Cartel - A formal organization of producers that agree to coordinate price and production.
Cartels only work if every member keeps to the agreed output levels.
For example, the Organization of the Petroleum Exporting Countries (OPEC) is a cartel of twelve developing countries.
Cartels are illegal in the United States.
Comparison of market structures:

9. The End