Monopolistic Competition and Oligopoly

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Monopolistic Competition• Relatively large number of sellers

• Small market shares

• No collusion

• Independent action

• Some control over price• Differentiated products

• Product attributes

• Service, location

• Brand-names, packagingLO1

Monopolistic Competition

• Easy entry and exit• Advertising

• Nonprice competition

LO1

Price and Output in Monopolistic Comp

• Demand is more elastic than pure monopoly because there are more rivals and substitutes

• Demand is less elastic than pure competition because there are fewer rivals and imperfect substitutes

LO2

Monopolistic Competition: Efficiency

• Inefficient

• Productive inefficiency•P > ATC

• Allocative inefficiency•P > MC

LO2

Oligopoly

• A few large producers• Homogeneous or differentiated

products• Limited control over price

• Mutual interdependence

• Strategic behavior• Entry barriers• Mergers

LO3

Oligopolistic Industries

• Four-firm concentration ratio

• 40% or more to be oligopoly• Shortcomings

• Localized markets

• Inter-industry competition

• World price

• Dominant firms – Herfindahl Index

LO3

High Concentration Industries(1)

Industry(2)

4-Firm Concentration

Ratio

(3)Herfindahl

Index

(1)Industry

(2)4-Firm

Concentration Ratio

(3)Herfindahl

Index

Primary copper 99 ND Petrochemicals 85 2662

Cane sugar refining 99 NDSmall arms ammunition 83 1901

Cigarettes 95 ND Motor vehicles 81 2321

Household laundry equipment 93 ND

Men’s slacks and jeans 80 2515

Beer 91 ND Aircraft 81 ND

Electric light bulbs 89 2582 Breakfast cereals 78 2521

Glass containers 88 2582Household vacuum cleaners 78 2096

Turbines and generators 88 ND Phosphate fertilizers 78 1853

Household refrigerators and freezers 85 1986

Tires 77 1807

Electronic computers 76

2662

Primary aluminum 85 ND Alcohol distilleries 71 1609

LO1

3 Oligopoly Models

• Kinked Demand Curve• Collusive Pricing• Price Leadership• Reasons for 3 models

• Diversity of oligopolies

• Complications of interdependence

LO5

Kinked Demand Curve

• Criticisms

• Explains inflexibility, not price

• Prices are not that rigid

• Price wars

LO6

Overt Collusion

• Collusion reduces uncertainty, improves control of price, profits rise, and prevents entry of firms

• Cartels - a group of firms or nations that collude

• Formally written agreement

• Sets output levels and price for members

• OPECLO6

Covert Collusion

• Gentleman’s agreements

• Informal understandings often in social settings between firms about price and output

LO6

Obstacles to Collusion

• Demand and cost differences• Number of firms • Cheating• Recession• New entrants• Legal obstacles• Golden Balls

LO6

Global Perspective

LO6

Price Leadership Model

• Price Leadership

• Dominant firm initiates price changes

• Communicates price change

• Other firms follow the leader• Use limit pricing to block entry of new

firms• Possible price war

LO6

Oligopoly and Efficiency

• Oligopolies are inefficient

• Productively inefficient P > minATC

• Allocatively inefficient P > MC• Qualifications

• Increased foreign competition

• Limit pricing

• Technological advance

LO7