Monopolistic Competition and

Oligopoly

Monopolistic Competition

• Many companies compete to sell products that are similar but not identical.• JEANS, bagel shops, ice cream stands, gas stations, retail stores.FOUR CONDITIONS• *MANY FIRMS• *FEW ARTIFICIAL BARRIERS TO ENTRY- Patents don’t protect

anyone from competition.• *SLIGHT CONTROL OVER PRICE• *DIFFERENTIATED PRODUCTS- Can differentiate their product

from the other products in the market.

• Differentiation- making a product different from other similar products.

Nonprice Competition• Competition through ways other than lower prices.• Physical Characteristics- Change size, color, shape,

texture or taste.• Running shoes, cars, pens, and toothpaste.

• Location- Where they are sold. (Gas station on 82)• Service Level- High level of service (restaurants vs. fast

food)• Advertising, image or status- designer shirts.

Price, output, and profits

• PRICES- higher than in perfect competition, firms have some power to raise prices.

• OUTPUT- between monopoly and perfect competition• PROFIT- earn just enough to cover all costs

• If they earned more more people would enter the market and differentiate the product, lowering price. People will switch to the new product.

ORThey will differentiate their product to try and lure customers back.

Oligopoly• Market dominated by a few large, profitable firms.• (IMPERFECT FORM OF MONOPOLY)• 4 largest firms produce 70-80% of the output• Set prices higher and output lower.• Significant barriers to entry keep new companies from

entering. (sometimes patents or govnt licenses). • Sometimes exist because of high start up costs (Airlines)• Sometimes exist because of existing brands (Soda).

Cooperation, Collusion and Cartels

• Leaders can cut costs can start a PRICE WAR (when competitors cut their prices very low to win business)• GOOD FOR CONSUMER– BAD FOR PRODUCERS

• Collusion - agreement among members of an oligopoly to set prices and production levels. • can lead to price fixing- an agreement among firms to

sell at the same or very similar prices. • ILLEGAL!

• Cartel- agreement by a formal organization of producers to coordinate prices and production. • ILLEGAL!• Strong incentive to cheat and produce more……