Monopolistic+Competition+&+Oligopoly

7/18/2019 Monopolistic+Competition+&+Oligopoly

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Price Determination underMonopolistic Competition &

Oligopoly

Dr. Utpal ChattopadhyayAsst. Professor, NITIE .



MonopolisticCompetition

Many frmsDi erentiated products (is in general a

strategic marketing goal) – products areclose substitutes to eac ot er!Demand cur"e not completely #at$irms do not react to eac ot er%s actions

(because t ere are so many)asy entry and e'it

'amples s irts candy barsrestaurants



*e a"ior o+ monopolisticallycompetiti"e frms

$irms in an ,industry group- are similar(symmetric in e'treme) i.e. t ey a"e t e sameincenti"es

at appens i+ frm c anges price alone/ (dd)0ame incenti"e +or ot er frms to c ange price(DD)11112 demand is steeper in t is case

3n t e e'treme a "ery small frm – c anging t e price alone– as a "ery #at demand cur"e4

Marketing is important frms 5ant to make t eirproduct ,uni6ue- in ot er 5ords

Demand +or t eir product s ould get more inelastic(steep)

7se ad"ertising4



Demand cur"e i+ t e frm (dd) or t eindustry (DD) c anges price





0 ort1run e6uilibrium

8ike a monopolist set price 5 eremarginal re"enue 9 marginal cost

Profts arise1112 market entry o+ similar products (frms)ac frm competes +or a percentage o+ totaldemand ne5 entry means demand +or t e

indi"idual frm must be lo5er (s i+ts le+t:do5n)0 i+t must be so +ar t at profts disappear3.e. Demand cur"e must fnally be tangential tolong1run a"erage cost cur"e



8ong1run e6uilibrium

Due to market entrydemand s i+ted to t ele+t +or t e frm

;ero proft conditionmet (<e"enue9Costs)

Proft1ma'imi=ationcondition met (MC9M<)

Problem production isnot cost1e>cient8ong1run a"eragecosts not at minimum,cost- o+ product"ariety



Per+ect Competition ?s.

Monopolistic CompetitionPC price e6ual to long1run marginal cost inMonC price is al5ays ig er as marginal cost

t ere are people out t ere 5 o "alue t egood more t an t e marginal cost toproduce it.

992 in principle production s ould risePC produces at minimum o+ long1run a"erage

cost MonC not at t e minimum @rade1O bet5een e>ciency (cost) and"ariety8ong1run proft situation is alike because o+entry but o5 s ort is t e s ort1run//



0ummary1MonopolisticCompetition

?ery common market +ormAo interaction bet5een frms

$irm could reduce a"erage cost by producingmore$irms try to bind t eir costumers to t e frm

Marketing ad"ertising plays a role (not in

per+ect competition)Make t e product di erent +rom t e cro5d



OligopolyB. $e5 0ellers : <ecogni=ed3nterdependence*. Cournot Model

$irms c oose 6uantity

Bssume t at ot er frm does c angeoutput'ample compared to PC andMonopoly



Oligopoly 1 *ertrand

Model $irms c oose price rat er t an output.

it identical goods and constant MCt en P9/3+ products are di erentiated. 1'ample



Oligopoly 1 C amberlin

(Monopolistic Competition)Critici=ed *ertrand and Cournotmodels because t ey +ailed to

recogni=e t eir interdependence. eargued t at intelligent managers5ould kno5 5 ere t e proft1ma'imi=ing price is and 5ould bereluctant to reduce price and lea"e allmembers o+ t e industry 5orse o .



Oligopoly 1 0tackelberg

Model 1Price 8eaders ipDesignate one frm as a dominant frmand all t e ot er s in t e industry +ollo5t is frm s cues. 3.e. one frm announceprice c anges and all t e ot ers +ollo5.

'amplesButomoti"e industry

*anking 3ndustry



Oligopoly 1 0tigler s

@ eory3ncenti"e to collude is strong so as toma'imi=e Eoint profts but so is t e

incenti"e to c eat. 3+ any member cansecretly "iolate t e agreement e 5illgain larger profts t an by con+ormingto it. @ ere+ore en+orcement i.e.detecting signifcant de"iations +romt e agreed1upon prices is paramount



0tigler e'ample0uppose F identical frms 5it =erocosts +acing a market demandcur"e o+ G9HIJ1KP. @ e monopolyprice and 6uantity is LHI and Jand t e t ree frms agree to eac

supply FJ. @ e LHN J industryprofts are split LK J to eac .



Oligopoly



Oligopoly

d is t e demand cur"e 5 en e"eryonekno5s (e"eryone makes KFF.FF) d is5 en t ere are secret cuts(i+ o ered toall is customers t en LN J i+ only toQne5Q customers 1 LRJJ) d is secret cutt at steals a5ay ot er frms customers5it out t e ot er frm reacting 1 LIJJ).Conclusion 1 t ere is a great temptationto secretly cut prices. Sey is detectionand response.



Oligopoly 1 Tame @ eoryPrisoner s Dilemma 1 @5o suspectedcriminals B and * are arrested and put inseparate cells unable to communicate. 3+one con+esses 5 ile t e ot er does not t eone 5 o con+esses is granted immunity andgoes +ree and t e ot er goes to Eail +or Jyears. 3+ bot con+ess t ey bot go to Eail +or

K years. 3+ bot are silent bot go to Eail +oronly one year +or a lesser crime (concealed5eapons). @ e payo matri' looks like t is



Oligopoly

ate"er B does * is better o con+essing.ate"er * does B is better o con+essing. @ ey

are bot better o i+ t ey bot remain silent.o5 can t is be/

Mr. B Mr. *Con+esses <emains

0ilentCon+esses U1K 1KV UJ 1 JV<emains0ilent

U1 J JV U1H 1HV



Oligopoly

Duopolist s Dilemma

Dominant 0trategy is to cut price but bot frms arebetter o by f'ing prices.

$irm B $irm *

Cut Price (<s.H )

$i' Price (<s.HI)

Cut Price (<s.H )

UR J R JV UH J JV

$i' Price (<s.HI)

UJ H JV UIHJ IHJV



Can Collusion bebenefcial/

3t reduces uncertainty in proft rate demand uncertainty in t e +ace o+

production indi"isibilities'ample



Can Collusion bebenefcial/

3ndi"isibilities in production.

Ot er problems 1 large f'ed and somea"oidable costs 5it uncertain demand.

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Monopolistic+Competition+&+Oligopoly