monopolistic competition · monopolistic competition: * relatively large number of sellers - fewer...
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Monopolistic Competition and Oligopoly
Monopolistic Competition:
* relatively large number of sellers
- fewer than in purely competitive market, more than in pure monopoly…
* relatively easy entry into and exist from the market
* differentiated products (accompanied by heavy advertising)
* more competition than monopoly in this market model
- common —> 25-70 sellers in this market model
Monopolistic Competition - some examples
* bars and nightclubs in a given area
* hair salons in a given area
Relatively Large Number of Sellers:
* Generally fewer than 100 sellers- 100s and 1,000s ==> shift toward pure competition
* each firm has small share of total market
- limited control over market price of products
- vs. pure competition => firms have very (very) small share of market and no control over market price
No Collusion
“I never colluded. There was no collusion.
It’s a terrible, terrible thing this collusion business.”
No Collusion
* Too many sellers for them to coordinate to restrict output and set prices (aka rig the market)
* Enough sellers that firms can set prices independently
* Firm A’s price changes may increase/decrease their own sales, but will have little effect on other sellers in market
Differentiated Products
* Pure competition => standardized products
- bananas, strawberries, .2 lead refills for mechanical pencils, staples, etc.
* Monopolistic Competition = variations of given products or services
- physical or qualitative differences: design, materials, workmanship, functional capacities, knowledge and expertise, etc.
- service differences: customer service levels, quickness of response to customers
Differentiated Products
- location: accessibility of stores (local corner store can compete with big box store because of its proximity to neighborhood); hotels/motels… near freeways, airports, etc.
- brand names and packaging: celebrity connections, appeal of packaging to different target groups (age, gender, special interests)
Market Entry and Exit
* What would be a main barrier to entry for a firm in a competitive monopoly?
- advertising costs to establish brand and compete with existing firms
- some firms have trademarks and/or trade secrets that make it difficult to be imitated
- “non-price competition”; increase influence of non-price factors and downplay price differences
- successful firms will have less elastic demand
Demand Curve for Monopolistic Competition
Pric
e an
d C
osts
Quantity
D
* Demand curve is highly but not purely elastic
Purely Elastic - as in Pure Competition
Pure Monopoly - D is more inelastic
Demand Curve for Monopolistic Competition
Why not purely elastic?
* Monopolistic competitor has fewer rivals
* Products are differentiated and are not perfect substitutes
— A firm’s price change won’t necessarily mean that consumers automatically buy from competitors
* Ed depends on number of firms in market and degree of product differentiation
— larger # of rivals and weaker product differentiation = greater elasticity of demand for a given firm (will shift towardpure competition and thus pure elasticity)
Price and Output Short-run Profit
Short-run Loss
Long-run Normal Profit
Long-run Normal Profit
Short-run Profit=> more firms entering market, more close-substitutes=> each firm has smaller share of total market=> demand for each firm falls (curve shifts left)
Long-run Normal ProfitShort-run Loss=> firms losing money will exit market=> fewer close-substitutes in market=> each firm left will have greater share of total market=> demand for each firm will rise (curve shifts right)
Oligopoly
Pure Competition
Monopolistic Competition Oligopoly Pure
Monopoly
* market with a few large producers of either homogenous or differentiated products
* have large shares of total market
* have significant control over their own pricing… but they must consider how their rivals will react
* oligopolies can be global, national, or local
- world => smartphone producers
- national => steel industry (3 main producers in US)
- local => e.g. auto-repair shops in given area
* products can be homogenous (essentially standardized) or differentiated
Mutual Interdependence
* the decisions of a firm will significantly affect the profits of its rival firms
* i.e. the success of an oligopolist depends on the pricing, advertising, brand loyalty, quality of other firms
* firms must make decisions strategically, thinking about how competitors might react
Barriers to Entry
* similar to barriers to entry for pure monopoly
* economies of scale: for some industries only a few companies will reach economies of scale
- e.g. aircraft, rubber, copper industries
* requirement of capital: large expenditure for plants, equipment, etc. to compete with established firms
- e.g. automobiles, oil refineries
* ownership and control of raw materials- e.g. gold, silver, and copper mining industries
Mergers
Natural growth of firm to oligopoly
Merger of 2 or More Firms
- increases market share
- greater control over pricing
e.g. breakfast cereals, chewing
gum, candy- allow for greater
economies of scale