Chapter 8

Imperfect Competition

Monopolistic Competition Characteristics

Many sellers Easy entry and exit Differentiated product Nonprice competition Price Searcher

Model Zero economic profits in the long run Demand saturation Turnover rate Excess capacity: wastes resources

Advertising Increases Demand Differentiate products Sends a signal to customers

Brand name – word, picture or logo Trademark – mark or motto

Exclusive rights

Expensive

Oligopoly Characteristics

Few dominant sellers Differentiated product Nonprice competition Interdependence

Opportunistic behavior – ignore long term effects of cooperation

Noncooperative behavior – maximize their own welfare

Market Power Concentration Ratio = Sales of top 4/Sales of

the industry Duopoly – 2 firms

Price Discrimination – charging different consumers different prices for the same good Conditions

Market power Segment the market

Location Age Gender Time of Use

Seal the market – prevent reselling Turns loss into a profit

Oligopoly Models Collusion – Agreement among parties to set the

price Incentive to cheat

Price Leadership – one firm sets the price and the others follow

Tacit collusion – don’t actually meet Price War – repeatedly cutting price to capture

more market share Game Theory – shows interdependence among

firms Strategic dependence – each reacts to the

actions of the others Kinked Demand Curve – firms follow a price

decrease but not an increase