Chapter 7 Section 3Monopolistic Competition and Oligopoly

Monopolistic Competition A type of market structure in which

many companies sell products that are similar but not identical.

But to make their product sell, they have to change it up and be unique.

What products do you buy that have similar but slightly varied competitors?

How do they vary?

Monopolistic Competition Companies hold a monopoly over their

own particular product design.

These firms sell goods that are similar but not identical.

Jeans are an example. (names, styles, colors, and sizes. ) Also, bagel shops, ice cream, and retail

stores.

The 4 Conditions of M.C.1. Many firms – low start up costs

2. Few artificial barriers to entry – no patents protecting the basic product identity.

3. Little control over price – If prices raise too high, people will buy a substitute.

4. Differentiated products – prices can be raised slightly because of the variations among competitors.

Nonprice Competition A way to attract customers through

characteristics other than price. Physical Characteristics

New size, color, shape, texture, or taste. These tend to model a person’s personality, job, family, or income.

Location Goods are separated by where they are sold. If the

item is scarce in a certain area, the price might be higher. If sold in a boutique, the price will be higher.

Service Level Firms can charge higher prices if they offer a higher

level of service. (restaurants) Advertising, Image, Status

Advertising is used to point out differences.

Prices, Output, and Profit Monopolistic competition looks similar to perfect

competition. Prices – Slightly higher, but limited because other

firms can easily enter the market. Output: Prices here are higher than perfect

competition, but lower than monopoly. Output falls somewhere in the middle. Law of Demand.

Profits: The firms earn just enough to cover all of their costs. If it makes too much profit, a rival firm will work to steal its competition away, or a new firm will enter the market and offer a cheap substitute.

Production Costs and Variety: There will be many firms, each with a low output, preventing minimized costs and efficiency; however, consumers can benefit from having a wide variety to choose from.

Oligopoly A market dominated by a few large

firms. High prices, low output. Examples: air travel, cars, breakfast

cereals, and household appliances. Barriers to Entry –

There can be barriers: technological or patent/license prevention.

Also, the reality is that some companies can and will destroy your small business (Coke and Pepsi)

Creates Economies of Scale

Cooperation and Collusion - Cheating When an oligopoly occurs, firms will act as though they

have a monopoly. Price Leaders

Can set prices and output for entire industries as long as other member firms go along with the leader’s policy. This can also start a price war (undercutting prices)

Collusion - informal An agreement among members of an oligopoly to illegally set

prices and production levels. One outcome is called price fixing (same or similar prices)

Cartel – Stronger than Collusion, formal An agreement by a formal organization of producers to

coordinate prices and production. Illegal in the US, but OPEC exists internationally. These can collapse if output levels are controlled, but most try to produce more (cheat) and prices will eventually fall.

Chapter 7 Section 4Regulation and Deregulation

• What is the cartoon implying about standard oil?

• How is this a bad situation for the consumers?

Market Power Control prices

Total market output

Seemingly Monopolistic Competition Tide, Dash, Dreft, Ivory Snow, Bold,

Oxydol, Cheer, and Gain are all detergents.

ALL are owned by a single company – P&G

Government and Competition Antitrust laws are in place to prevent

companies from unfairly pushing out competition.

Trust = business that has too much market power

U.S. has shut down many trusts in the past including: American Tobacco Company, Standard Oil, and AT&T.

Overall - Markets dominated by one or a few

firms tend to have higher prices and lower output than markets with multiple firms.

The government can use regulatory laws and deregulation to promote competition, often resulting in more choices, lower prices, and better products for consumers.

Market Structure Comparison p.170

Perfect Competitio

n

Monopolistic

Competition

Oligopoly Monopoly

Number of Firms Many Many A few

dominate One

Variety of Goods None Some Some None

Control over prices None Little Some Complete

Barriers to Entry None Low High Complete

ExamplesWheat,

shares of stocks

Jeans, Books

Cars, movie studios

Public Water