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7/25/2019 Ch13 Monopolistic Competition and Oligopoly
1/18
2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
CHAP
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CHAP
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Prepared by: FernandoPrepared by: Fernando
Quijano and Yvonn QuijanoQuijano and Yvonn Quijano
Monopolistic Competition andMonopolistic Competition and
OligopolyOligopoly
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
2/18
2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
$onopolistic Competition$onopolistic Competition
% && monopolistically competitivemonopolistically competitive
industryindustryhas the follo'inghas the follo'ing
characteristics(characteristics(
% & large number of firms& large number of firms
% )o barriers to entr)o barriers to entr
% Pro*uct *ifferentiationPro*uct *ifferentiation
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
3/18
2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
$onopolistic Competition$onopolistic Competition
% Monopolistic competitionMonopolistic competitionis a commonis a common
form of in*ustr +maret- structure in theform of in*ustr +maret- structure in the
.nite* tates, characterie* b a large.nite* tates, characterie* b a large
number of firms, none of 'hich can influencenumber of firms, none of 'hich can influencemaret price b 1irtue of sie alonemaret price b 1irtue of sie alone
% ome *egree of maret po'er is achie1e*ome *egree of maret po'er is achie1e*
b firms pro*ucing *ifferentiate* pro*uctsb firms pro*ucing *ifferentiate* pro*ucts
% )e' firms can enter an* establishe* firms)e' firms can enter an* establishe* firms
can e3it such an in*ustr 'ith easecan e3it such an in*ustr 'ith ease
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
4/18
2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Case for Pro*uct 5ifferentiation4he Case for Pro*uct 5ifferentiation
an* &*1ertisingan* &*1ertising
% 4he a*1ocates of free an* open4he a*1ocates of free an* open
competition belie1e that *ifferentiate*competition belie1e that *ifferentiate*
pro*ucts an* a*1ertising gi1e thepro*ucts an* a*1ertising gi1e the
maret sstem its 1italit an* are themaret sstem its 1italit an* are thebasis of its po'erbasis of its po'er
% Pro*uct *ifferentiation helps to ensurePro*uct *ifferentiation helps to ensure
high ualit an* efficient pro*uctionhigh ualit an* efficient pro*uction
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
5/18
2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Case for Pro*uct 5ifferentiation4he Case for Pro*uct 5ifferentiation
an* &*1ertisingan* &*1ertising
% &*1ertising pro1i*es consumers 'ith&*1ertising pro1i*es consumers 'ith
the 1aluable information on pro*uctthe 1aluable information on pro*uct
a1ailabilit, ualit, an* price thata1ailabilit, ualit, an* price thatthe nee* to mae efficient choicesthe nee* to mae efficient choices
in the maret placein the maret place
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
6/18
2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Case &gainst Pro*uct4he Case &gainst Pro*uct
5ifferentiation an* &*1ertising5ifferentiation an* &*1ertising
% Critics of pro*uct *ifferentiation an*Critics of pro*uct *ifferentiation an*
a*1ertising argue that the amount toa*1ertising argue that the amount to
nothing more than 'aste an*nothing more than 'aste an*
inefficiencinefficienc
% Enormous sums are spent to createEnormous sums are spent to create
minute, meaningless, an* possiblminute, meaningless, an* possibl
none3istent *ifferences amongnone3istent *ifferences amongpro*uctspro*ucts
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
7/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Case &gainst Pro*uct4he Case &gainst Pro*uct
5ifferentiation an* &*1ertising5ifferentiation an* &*1ertising
% &*1ertising raises the cost of pro*ucts&*1ertising raises the cost of pro*ucts
an* freuentl contains 1er littlean* freuentl contains 1er little
information 7ften, it is merel aninformation 7ften, it is merel an
annoanceannoance
% People e3ist to satisf the nee*s of thePeople e3ist to satisf the nee*s of the
econom, not 1ice 1ersaeconom, not 1ice 1ersa
% &*1ertising can lea* to unpro*ucti1e&*1ertising can lea* to unpro*ucti1e
'arfare an* ma ser1e as a barrier to'arfare an* ma ser1e as a barrier to
entr, thus re*ucing real competitionentr, thus re*ucing real competition
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
8/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
7ligopol7ligopol
% &n&n oligopolyoligopolyis a form of in*ustris a form of in*ustr
+maret- structure characterie* b a+maret- structure characterie* b a
fe' *ominant firms Pro*ucts mafe' *ominant firms Pro*ucts ma
be homogeneous or *ifferentiate*be homogeneous or *ifferentiate*
% 4he beha1ior of an one firm in an4he beha1ior of an one firm in an
oligopol *epen*s to a great e3tentoligopol *epen*s to a great e3tent
on the beha1ior of otherson the beha1ior of others
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
9/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
7ligopol $o*els7ligopol $o*els
% &ll in*s of oligopol ha1e one&ll in*s of oligopol ha1e one
thing in common(thing in common(
% 4he beha1ior of an gi1en4he beha1ior of an gi1en
oligopolistic firm *epen*s on theoligopolistic firm *epen*s on the
beha1ior of the other firms in thebeha1ior of the other firms in the
in*ustr comprising the oligopolin*ustr comprising the oligopol
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
10/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Collusion $o*el4he Collusion $o*el
% & group of firms that gets together& group of firms that gets togetheran* maes price an* outputan* maes price an* output*ecisions 8ointl is calle* a*ecisions 8ointl is calle* a cartelcartel
% Collusion occurs 'hen price9 an*Collusion occurs 'hen price9 an*uantit9fi3ing agreements areuantit9fi3ing agreements aree3plicite3plicit
% Tacit collusionTacit collusionoccurs 'hen firmsoccurs 'hen firmsen* up fi3ing price 'ithout a specificen* up fi3ing price 'ithout a specificagreement, or 'hen agreements areagreement, or 'hen agreements areimplicitimplicit
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
11/18
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
12/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Price9:ea*ership $o*el4he Price9:ea*ership $o*el
% &ssumptions of the price9lea*ership mo*el(&ssumptions of the price9lea*ership mo*el(
"" 4he in*ustr is ma*e up of one large firm an* a4he in*ustr is ma*e up of one large firm an* a
number of smaller, competiti1e firms;number of smaller, competiti1e firms;
22 4he *ominant firm ma3imies profit sub8ect to4he *ominant firm ma3imies profit sub8ect to
the constraint of maret *eman*the constraint of maret *eman* andandsub8ect tosub8ect to
the beha1ior of the smaller firms;the beha1ior of the smaller firms;
## 4he *ominant firm allo's the smaller firms to4he *ominant firm allo's the smaller firms tosell all the 'ant at the price the lea*er has setsell all the 'ant at the price the lea*er has set
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
13/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
4he Price9:ea*ership $o*el4he Price9:ea*ership $o*el
% 7utcome of the price9lea*ership mo*el(7utcome of the price9lea*ership mo*el(
"" 4he uantit *eman*e* in the in*ustr is split4he uantit *eman*e* in the in*ustr is split
bet'een the *ominant firm an* the group ofbet'een the *ominant firm an* the group of
smaller firmssmaller firms
22 4his *i1ision of output is *etermine* b the4his *i1ision of output is *etermine* b the
amount of maret po'er that the *ominant firmamount of maret po'er that the *ominant firm
hashas
## 4he *ominant firm has an incenti1e to push4he *ominant firm has an incenti1e to push
smaller firms out of the in*ustr in or*er tosmaller firms out of the in*ustr in or*er to
establish a monopolestablish a monopol
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
14/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
Pre*ator PricingPre*ator Pricing
% 4he practice of a large, po'erful firm4he practice of a large, po'erful firm
*ri1ing smaller firms out of the*ri1ing smaller firms out of the
maret b temporaril selling at anmaret b temporaril selling at an
artificiall lo' price is calle*artificiall lo' price is calle*predatory pricingpredatory pricing
% uch beha1ior became illegal in theuch beha1ior became illegal in the
.nite* tates 'ith the passage of.nite* tates 'ith the passage ofantimonopol legislation aroun* theantimonopol legislation aroun* the
turn of the centurturn of the centur
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
15/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
16/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
Contestable $aretsContestable $arets
% & maret is& maret isperfectly contestableperfectly contestableifif
entr to itentr to it andande3it from it aree3it from it are
costlesscostless
% =n contestable marets, e1en large=n contestable marets, e1en large
oligopolistic firms en* up beha1ingoligopolistic firms en* up beha1ing
lie perfectl competiti1e firmslie perfectl competiti1e firms
Prices are pushe* to long9runPrices are pushe* to long9runa1erage cost b competition, an*a1erage cost b competition, an*
positi1e profits *o not persistpositi1e profits *o not persist
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
17/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !airKarl Case, Ra !air
7ligopol is Consistent 'ith7ligopol is Consistent 'ith
a >ariet of Beha1iorsa >ariet of Beha1iors
% 4he onl necessar con*ition of oligopol is4he onl necessar con*ition of oligopol is
that firms are large enough to ha1e somethat firms are large enough to ha1e some
control o1er pricecontrol o1er price
% 7ligopolies are concentrate* in*ustries &t7ligopolies are concentrate* in*ustries &t
one e3treme is the cartel, in essence,one e3treme is the cartel, in essence,
acting as a monopolist &t the otheracting as a monopolist &t the other
e3treme, firms compete for smalle3treme, firms compete for small
contestable marets in response tocontestable marets in response toobser1e* profits =n bet'een are a numberobser1e* profits =n bet'een are a number
of alternati1e mo*els, all of 'hich stressof alternati1e mo*els, all of 'hich stress
the inter*epen*ence of oligopolistic firmsthe inter*epen*ence of oligopolistic firms
7/25/2019 Ch13 Monopolistic Competition and Oligopoly
18/18 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics 6/ePrinciples of Economics 6/e Karl Case Ra !airKarl Case Ra !air
7ligopol an* Economic Performance7ligopol an* Economic Performance
% 7ligopolies, or concentrate* in*ustries, are7ligopolies, or concentrate* in*ustries, are
liel to be inefficient for the follo'ing reasons(liel to be inefficient for the follo'ing reasons(
% 4he are liel to price abo1e marginal cost 4his4he are liel to price abo1e marginal cost 4hismeans that there 'oul* be un*erpro*uction frommeans that there 'oul* be un*erpro*uction from
societ?s point of 1ie'societ?s point of 1ie'
% trategic beha1ior can force firms into *ea*locstrategic beha1ior can force firms into *ea*locs
that 'aste resourcesthat 'aste resources
% Pro*uct *ifferentiation an* a*1ertising ma pose aPro*uct *ifferentiation an* a*1ertising ma pose a
real *anger of 'aste an* inefficiencreal *anger of 'aste an* inefficienc