Chapter 11Rivalry,

Oligopoly, and Monopolistic Competition

Introduction to Economics (Combined Version) 5th Edition

Rivalry vs. Competition In the phrase “perfect

competition,” the word competition refers to market structure.

In everyday conversation, we often use competition to mean business rivalry between firms that are oligopolists or monopolistic competitors

Introduction to Economics (Combined Version) 5th Edition

The ongoing struggle for market share between Boeing and Airbus is an example of business rivalry between oligopolists

Oligopolistic Interdependence

The term oligopolistic interdependence means the need to pay close attention to the actions of rivals when making pricing or production decisions

Introduction to Economics (Combined Version) 5th Edition

Even small firms like street vendors can exhibit oligopolistic interdependence

Cartels A cartel is a group of firms

that work together to maximize their joint profits by fixing prices and limiting output.

Cheating by members often causes cartels to collapse or limits their ability to keep prices high.

Introduction to Economics (Combined Version) 5th Edition

The Organization of Petroleum Exporting Countries (OPEC) is the world’s best-known cartel

Competition vs. Cartel This graph shows an industry made up of 100 firms, each producing at a

constant long-run average and marginal cost. If the firms act like perfect competitors, the industry will be in equilibrium at

the point at which the demand and marginal cost curves intersect. A cartel can jointly earn profits by restricting output to the point at which

marginal cost equals marginal revenue and raising the price from $1 to $2.

Introduction to Economics (Combined Version) 5th Edition

Cartels Oligopoly can be analyzed in

terms of game theory In a Nash equilibrium

solution to a game, each firm’s strategy is optimal when it assumes that its rival also pursues an optimal strategy

Introduction to Economics (Combined Version) 5th Edition

Oligopoly can be viewed as a game in which rivals plan moves and countermoves to try to win market share

Cartels The figure shows the profits Alpha

Company would earn under each price or its profits and the profits of its rival Zed Enterprises.

If both set their prices at $5, each will earn $400.

If both lower their prices to $4, they will each will earn $360.

If Alpha lowers its price while Zed does not, it will steal many customers and earn $540 while Zed’s profits fall to $200.

If Zed lowers its price while Alpha’s remains at $5, Zed will steal many customers, earning $50 and leaving Alpha with only $200.

Introduction to Economics (Combined Version) 5th Edition

Short-Run Equilibrium Under Monopolistic Competition

Under monopolistic competition, each firm is a price searcher with a negatively sloped demand curve.

There are no barriers to entry by new firms.

In the short run, a firm that produces at the point where marginal cost equals marginal revenue can earn pure economic profits

Introduction to Economics (Combined Version) 5th Edition

Long-Run Equilibrium Under Monopolistic Competition

In the long run, new firms are attracted to the market. That lowers each firm’s demand curve.

The fight to keep market share may increase costs.

Entry by new firms will continue until the market reaches a long-run equilibrium where pure economic profit disappears.

Introduction to Economics (Combined Version) 5th Edition