13:07

Monopolistic Competition& Oligopoly

Monopolistic Competition Oligopoly

13:07 13:07 2

Measuring market dominance

4-firm conentration ratio % sales from 4 largest firms > 40% then oligopoly < 40% then monopolistic comp.

13:07 13:07 3

Herfindahl-Hirschman Index (HHI)

largest 50 firms sum square of % market share used by Justice Department if monopoly

= (100)2 = 10,000

13:07 13:07 4

HHI (cont.)

if < 1000 market is competitive

if > 1800 market is uncompetitive

13:07 13:07 5

13:07 13:07 6

Oligopoly

small number of firms interdependent behavior barriers to entry

13:07 13:07 7

examples

Airlines Automobiles Cereal Soft Drinks

13:07 13:07 8

what types of barriers?

economies of scale auto industry

legal restrictions brand recognition

cereal, soft drinks

control over essential resource

13:07 13:07 9

Firm behavior

no one model of behavior set of possible behaviors

13:07 13:07 10

Cartel

firms collude to act like a single monopolist restrict output, charge higher price block entry

13:07 13:07 11

Price leadership

informal collusion dominant firm sets price

other firms follow to avoid a price war steel, airline, auto industries

13:07 13:07 12

cartels are tough to maintain each firm has output quota each firm tempted to cheat tough to block new entry

13:07 13:07 13

Collusion and Cartels

firms may collude divide market fix prices illegal in U.S.

examples OPEC ADM & others

13:07 13:07 14

Monopolistic Competition

large # of firms product differentiation compete w/ quality, price, marketing no one firm dominates no collusion among firms free to enter/exit

13:07 13:07 15

examples

running shoes fast food franchises clothing cleaning supplies beauty products

13:07 13:07 16

product differentiation

physical differences color, size, taste ...

location convenience, drug stores

services delivery

image high quality vs. value

13:07 13:07 17

Firm Behavior, short run

Tommy Hilfiger Jeans demand curve downward sloping

less elastic than perfect competition more elastic than a monopolist

choose price & output like a monopolist

13:07 13:07 18

P, cost

Q (jeans/day)

DMR

MC

150

$70

13:07 13:07 19

P, cost

Q (jeans/day)

DMR

MC

150

$70 ATC

$20

economic profit($70-$20)(150)= $7500

13:07 13:07 20

Long Run

zero economic profit why?

economic profit leads to entry economic loss leads to exit no entry/exit with zero economic profit

13:07 13:07 21

Excess capacity

firms output is not at minimum of ATC output too small loss of economic welfare

13:07 13:07 22

Advertising & marketing

firms in monopolistic competition spend more on this than perfect competition cost curves are higher is this a waste? Or do consumer benefit from greater selection?

13:07 13:07 23

13:07 13:07 24

Summary

between perfect competition & monopoly monopolistic comp. chooses P & Q like a

monopolistic oligopolist behavior interdependent importance of product differentiation importance of strategic behavior