monopolistic competition & oligopoly. characteristics of monopolistic competition a relatively...
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Monopolistically Competitive Industries Clothing Industry Restaurants Jewelry Consumer ElectronicsTRANSCRIPT
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Monopolistic Competition &
Oligopoly
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Characteristics of Monopolistic Competition
• A relatively large number of sellers(Small Market Share, No Collusion, Independent Action)• Differentiated products(Product Attributes, Service, Location, Brands)• Easy entry and exit from the industry(Entry Eliminates Profits, Exits Eliminate Losses)• Advertising & Non Price Competition
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Monopolistically Competitive Industries
• Clothing Industry• Restaurants• Jewelry• Consumer Electronics
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Price and Output in Monopolistic Competition (SR vs. LR)
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Monopolistic Competition and Efficiency
• Productive efficiency is P= min ATC
• Allocative efficiency is P= MC• Not productive or allocative
efficiency • P>MC, meaning that resources
are underallocated; not allocatively efficient
• Firms do not produce where P= min ATC; therefore, not productively efficient
• Marginal revenue curve will never coincide with D=AR=P
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Monopolistic Competition&Excess Capacity
• Product differentiation creates excess capacity
• means that fewer firms operating at capacity could supply the industry output
• Excess capacity is the gap between the minimum ATC output and the profit-maximization output
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Monopolistic Competition &Product Variety
• Firms are able to have profit from differentiation in the long run because no exact substitute).
• Advertising may increase costs, but also demand, and help maintain long-run profit.
• Satisfies a wide range of consumer tastes and encourages innovation to differentiate.
• Max Profit is Price x Product x Advertising
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Characteristics of Oligopoly
1) A few large producers (Oil, Telecom, Soda).2) Homogenous OR differentiated products(Oil and Gasoline versus Automobiles)3) Price maker, but still mutually interdependent(Strategic Behaviour & Interdependance KEY!!)4) Relatively high entry barriers
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Mergers
• Merging of two or more competing firms is beneficial in that it may increase their market share significantly, and thus achieve greater economies of scale.
• The larger firm that results from a merger would have greater control over market supply and price.
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Measures of Industry Concentration
• Price Leadership• The Four Firm Concentration Ratio(determines whether a industry is monopolistic competition or oligopoly, magic number is 40%)• Herfindahl Index (Herfindahl-Hirschman Index
or HHI)(the sum of the squares of the market shares of each individual firm)
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Oligopoly Behavior: A Game Theory Overview
• Game Theory: study of how people/firms behave in strategic situations.
• Game Theory Model: can be used to analyse the behaviour of oligopolists.
• The “Payoff Matrix” and Collusive Behaviour.• Often the “Payoff Matrix” is represented by
the Prisoner’s Dilemma, which is used to explain ologopoly behaviour.
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Prisoner’s Dilemma
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Mutual Interdependence Revisited
• Oligopolistic firms can influence rival's profits by changing pricing strategies
• Each firm's profit depends on their pricing strategy in relation to their rival's
• Firms make decisions based on how they think other firms will react. They anticipate the next move
• Collusion is best, but firms cheat : (
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Oligopoly and Advertising
• Positive Effects of Ads:> Low-cost means to obtain info on product> Diminishes monopoly power by providing info on competing goods• Negative Effects of Ads:> Manipulate or persuade consumers> May create a barrier to entry with costs of advertising
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Oligopoly and Efficiency
• Remember the triple equality for economic efficiency: (P = MC = minimum ATC), Oligopolists do not achieve this.
• Produce where P > minimum ATC so they are not productively efficient.
• Produce where P > MC so they are not alocatively efficient.
• Oligopolies can be less desirable than monopolies because no regulation.