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CH
flT
ER
TE
N
Mon
opol
isfi
c
Com
petit
ion
and
Olig
opol
y
Inth
epre
\’io
1hv
och
apte
rs,
we
(‘S
ail
IIT
ied
the
hvr)
pobu
rT
ilar
ket
stnic
hi
ct’s
—per
fect
co
ilip
etil
ion
and
pu
rein
olo
ph
TIj
ese
two
mar
ket
stru
ctur
esar
t’th
eex
cept
ions
ill
tlic
ecoi
iom
v.not
till’
rule
.M
ost
mar
kets
inC
anad
afa
llIw
hv
eell
them
.T
he
term
imperfect
com
peti
tio
nis
used
byecoll
ulI
llis
isto
(iese
nhje
the
mar
ket
stni
etu
that
arc
neith
erpe
rfec
tIv
cIn
pet
itiv
e
nor
puIT
eh\
nlon
opil
list
ic.
The
seii
ichii
de
TIio
lio
pi)
Iist
ieell
lpeti
tiO
fl
inp
erfect
co
iilp
eti
tio
nam
ong
tlm
iianv
—am
idol
igop
olv—
inip
erfe
elcil
TIl
peti
tiO
nan
icin
gth
ele
n.Im
ith
isch
iiq,te
m;
xvt
(‘S
,tlU
iTi(
’th
ucl
iara
ctc’
nst
ics
amid
pro
fit—
IlbL
xiI
lIiz
—
iuig
rltc
isio
jis
1)1ilK
’in
onop
ohm
stic
alk
cIin
ih—
Ietti
’can
dol
igop
imlis
ticfir
imi.
‘‘‘
also
consi
der
the
efl
icie
mic
yof
thie
su’
ijauk
etsi
riic
tiiu
es’,
us(‘
(lilT
—
\‘‘i
tii
11eT
’l(’(’
lt’
oii
i1u
i’ti
tiii
li.
.
Obje
ctiv
es
a.
Out
line
tour
maj
orch
arac
teri
stic
sof
mon
opol
isti
call
yco
mpe
titi
vem
ark
ets
b.E
xam
ine
and
grap
hth
ede
man
d,co
st,
and
reve
nue
curv
esfo
ra
mon
opoh
stic
ally
com
peti
tive
firm
.C
.D
emon
stra
te,
usin
ggr
aphs
,th
esh
ort-
run
and
tong
-run
prof
it-m
axim
izin
gou
tput
ofth
em
onop
olis
tica
lly
com
peti
tive
firm
.d.
Dem
onst
rate
how
mon
opol
isti
call
yco
mpe
titi
vefi
rms
atte
mpt
toim
prov
eth
eir
long
-run
prof
itpo
siti
onth
roug
hno
n-pr
ice
com
peti
tion
.e.
Co
mp
are
mon
opol
isti
cco
mpe
titi
onan
dpe
rfec
tco
mpe
titi
onin
term
sof
effi
cien
cyI.
Exp
lain
and
anal
yze
the
mai
nch
arac
teri
stic
sof
olig
opol
ym
arke
ts9.
Ana
lyze
why
olig
opol
ypr
ice
theo
ryis
less
pre
cise
than
that
ofth
eot
her
mar
ket
stru
ctur
es.
h.D
emonst
rate
why
olig
opol
ypri
ces
are
‘sti
cky”
and
tend
toch
ange
toget
her
with
refe
renc
eto
the
kink
edd
eman
dcu
rve,
coll
usio
n,pr
ice
lead
ersh
ipan
dta
cit
agre
emen
tsi.
Ana
lyze
the
advan
tages
and
dis
advan
tages
ofim
perf
ect
com
peti
tion
j.Ex
oiau
nho
wan
dw
hygo
vern
men
tsre
guta
tem
onop
olie
san
dot
igop
ntue
san
ctev
alua
teth
eef
fect
iven
ess
ofth
en
easu
res
‘:IEN
TL
SE
(IFIIFS(
ILlicK
s
•M
onopolistic
Co
mp
etition
The
term
“n
ionopolistic
co
mp
etitio
ncorre
ctly
stig—
gestsele
ments
ofboth
perfectcom
petitionand
monopoly.
Monopolistic
competition
isa
market
structurein
which
many
firms
sella
differentiatedproduct.
The
largenum
berof
firms
means
thatcom
petitionexists, but each
firmhas
mi elem
ent of monop
olyin
thatits
productor
servicehas
aunique
aspect.Exam
plesof
monopobstically
coiiipetitiveindustries
includethe
retailtrade,
clothingindustiy,
andrestau
rantbusiness.
LiC
haracteristicsof
Monopolistic
Com
petition
Let’sexam
inethe
characteristicsof
monopolistically
competitive
firms
inm
oredetail.
Many
Fin
ns
Though
thenum
bera1
hnnsis
notas
greatas
ina
perfectlycom
petitivem
arket,each
firmhas
onlya
small
market share
and,therefore, only
limited
controlover
price.This
controlis
notenough
tohave
am
ajoreffect
onsales
of competitors.
If onefirm
manages
toincrease
itssales
bysay
20percent,
thisw
illhave
littleim
pacton
anindustry
of40
or.50
competitors.
Ifo
ne
clothingstore
out of50in
thecity, for exam
ple, holdsa
sale,it
will
attractm
orecustom
ersand
increaseits
sales,but
itw
illnot
takeaw
aya
largenum
berof
customers
fromany
oneofits
rivals.They
willstill have
enoughcustom
ersto
operate.H
owever,
ifthereare
onlythree
orfour
small
hardw
arestores
ina
small
town,the)’ are
oligopolists(as
we
will
seelater).
Ifone
storeoffers
asale
anda
largenum
berof
peoplebuy
from
tInsstore,
itw
illgreatly
reducesales
ofthe
otherstores
becausethey
dependvu
thesam
esm
allbase
olcustotners.C
onsumers
havea
choiceof
onlya
fewfin
ns.
Though
therem
aybe
tliouswids
ofhardw
arestores
inthe
largerregion,
theactual
number
theconsum
ern’alistic&
dlyhas
tochoose
fromis
anim
portantfactor
indeterm
iningw
hethera
market is
inonopolisticallycom
petitiveor oligopolistic.
Pro
duct
Differen
tiation
While
purelycom
petitivefirm
sturn
out astandardized
(orundifferentiated)
product,inonopolistically
com—
petitivefirm
sproduce
adilierciutiated
product—that
is,aproduct w
ithm
anyvariations.
Forexam
ple,m
an)firm
sproduce
shirts,but
theshirts
aredifferentiated
bycolour, cut, cloth, and
style.A
dvertising, packaging,and
brandnam
escan
emphasize
thedifferences.
Even
if productsare
physicallythe
same,
theycan
bediffer
entiatedin
anum
berof
ways.
Aone-litre
bottleof
Pepsi ina
nearbystore
isbetteron
ahotday
thanone
ina
far-away
store.Some
peoplew
ouldbe
willing
topay
alittle
more
forthe
Pepsiin
theneighbourhood
store.T
houghthe
productis
thesam
e,the
customer
perc
eiv
es
itasdifferent.
Productdifferentiation
givesindividual
monopolis
ticcom
petitorssom
econtrol
overprice.
Consum
ersare
willing,
within
narrowlim
its,to
paym
orefor
thegoods
of particular sellersand
canhave
limited
preferences
foroneover
others.
Few
Barriers
toE
ntry
Itis
relativelyeasy
toenter
rnonopolisticaflvcom
petitive
industries.Finns
andtheir
capitalrequirem
entstend
tobe
small.
Com
paredto
purelycom
petitivefirm
s,how
ever,there
may
beadditional
financialbur
(lensin
theform
ofadvertising,
packaging,and
otherw
aysof differentiating
aproduct
fromits
competitors.
Non-P
riceC
ompetition
Sinceproducts
inm
onopolisticcom
petitionare
differentiated,
competition
focussesnot
only’on
price,but
alsoon
suchnon-price
factorsas
advertising,brand
names,
andtrade
marks.
Firms
underm
onopolisticcom
petitionplace
agreat
importance
onthese
factorsto
attractloyal custom
ers.T
heheated
advertisingw
arw
agedby
softdrink
companies
isan
example.
Some
firms
may
alsooffer
specialservices
toattract
customers.
Some
pizzachains,
forexam
ple,w
illoffer
two-for-one,
freedcliv
c’
overa
largearea,
ora
freedrink
with
aparticular
order.
oD
emand,
Price,
andO
utputin
theS
hort-Run
The
demand
curvefaced
bythe
monopohisticdly
coinpetitive
firmis
elastic(dow
nward
sloping),b
ecause
its
producthas
alarge
number
ofpossible
substitutes.
N.
Consu
mer
sse
nsit
ive
toch
ange
siii
pri
cesi
nce
they
have
niai
iv.
diha
rpro
du
cts
fron
tw
hich
toch
oose
.If
[lie
mon
opol
isti
call
vco
mp
etit
ive
firim
ira
ises
itsco
nsid
erab
ly,
ther
efore
,it
‘ilI
lose
asi
gnif
ican
tam
notm
tof
itssa
les.
Som
en
isto
iner
sw
iil,
cont
iune
inn
ing
from
the
Lirii
ib
ecau
seo
fits
adva
ntag
eom
islo
cati
oniii
the
case
of
are
tail
stor
e,fo
rex
ampl
e,or
bec
ause
oflo
val
kto
ap
arti
nil
arb
ran
dnam
ein
tile
case
of
asi
naI!
clot
hing
inan
nfhc
ture
r.A
pri
cecu
t,on
the
oth
erha
nd.
will
attr
act
som
e,bu
tno
tall
of
itsco
mnp
ehto
rscu
stom
ers.
The
thn
nlw
ard
-slo
pin
gdem
and
cone
mea
nsth
atth
enu
mop
olis
tica
llv
com
pet
itiv
efi
nn’s
mar
gina
lre
ve
nue
nin
’eal
sosl
opes
dow
nwar
d.T
oin
crea
sesa
les.
the
finn
mus
tcu
tit
spr
ice
and
the
extr
are
ven
ue
froT
nea
chad
diti
onal
unit
sold
,th
eref
ore
.d
ecre
ases
asoutp
ut
incr
ease
s.T
he
effe
cto
fch
ange
sin
pri
ceon
tota
lsa
les
ill
dep
end
onth
enu
mbe
rof
com
pet
ito
rsm
idth
edeg
ree
ofpro
du
ctd
iffe
ren
tiat
ion
.T
he
larg
erth
enum
ber
ofco
mpet
itors
amid
the
wea
ker
the
pro
du
ctdi
ffer
entia
—ti
oti,
the
gre
ater
the
effe
cton
sale
sof
ach
ange
inpr
ice.
The
smal
ler
the
num
ber
of
com
pet
ito
rsan
dth
egre
ater
the
pro
duct
dif
fere
nti
atio
n,
the
smal
ler
the
effe
cton
sale
so
fa
chan
ge
inpr
ice.
Itis
clea
rly
inth
efi
rm’s
best
inte
rest
sto
dif
fere
nti
ate
itspro
duct
asm
uch
aspo
ssib
le.
CP
rofi
tM
axim
izat
ion
The
finn
will
ina’
ciin
ize
itspr
ofit
s(o
rni
inim
ize
itslo
sses
)in
the
shor
tru
nat
the
outp
ut
whe
rem
argi
nal
cost
equ
als
mar
gina
lre
ven
ue.
Soun
dfa
mili
ar?
Fig
ure
10.1
show
sth
atin
the
shor
trun
,the
finn
mak
esa
prof
itw
ithin
the
shad
edre
ctan
gle
PA
CE
.Pr
ice
per
unit
ishi
gher
than
aver
age
tota
lco
stw
ithin
tins
area
.The
firm
isii
ieq
uili
bnm
tin
atpoin
tE
.In
the
long
run,
how
ever
,th
isfa
vour
able
prof
itsi
tuat
ion
will
not
pers
ist.
Oth
erfi
rms
qhl
been
tice
din
totI i
ein
dust
ivlw
the
abov
eno
rTna
lpr
ofit
s.T
he
firi
ji’s
dem
and
curv
ew
ill,
ther
efore
,.s
hift
toth
ele
ftfr
omD
Dii
iF
igu
re10
.1to
RD
2in
Fig
ure
10.2
.T
hefi
rmth
enha
sa
smal
ler
shar
eof
time
mar
ket
due
toth
ein
crea
sed
con
ipet
itio
ntL
imd
dim
mnn
islii
ngp
rod
uct
difh
r—en
tiat
ion.
amid
econ
omic
prof
its
will
heeh
imni
iate
d.T
he
Fig
ure
10.1
Short
-ru)f
itm
axim
izat
ion
and
equil
ibri
um
un
der
mo
no
po
list
icco
mpe
titi
on
0, C 0 ‘C C I a, 0 a, U a-
.
Qua
ntity
(uni
ts)
The
mo
no
po
list
ical
lyco
mpet
itiv
efi
rmh
asa
dow
nwar
d-sl
opin
gde
man
dcu
rve
bec
ause
itspr
oduc
tfa
ces
com
peti
tion
from
anu
mbe
rof
clos
esu
bst
itute
s.P
rofi
tIs
max
imiz
edat
the
outp
utw
here
MR
=M
C,
inth
isca
se20
0un
its.
At
that
outp
ut,
aver
age
reve
nue
orpr
ice
at$1
7ex
ceed
sav
erag
eto
tal
cost
at$1
5.M
axim
umpr
ofit
Is,
ther
efor
e,$2
.E
cono
mic
prof
itis
show
nD
yth
esh
aded
rect
angl
ePA
CE
.
20D
,
15
Fig
ure
10.2
Long-r
un
pro
fit
max
imiz
atio
nan
deq
uili
briu
mun
der
mon
opol
isti
cco
mpet
itio
n
AT
C
0 ‘C C z C a a, U 0-
00
MR
100
160
200
300
Qua
ntit
y(u
nits
)
Ove
rth
elo
ng-r
un,
econ
omic
prof
its
wiil
attr
act
othe
rfi
rms
into
the
indu
stry
.S
ince
the
firm
then
has
asm
alle
rsh
are
ofth
em
arke
t,its
dem
and
curv
esh
ifts
left
toD
,D2
and
Its
econ
omic
prof
itis
elim
inat
ed.
The
long
-run
equi
libr
ium
for
the
firm
isat
apr
ice
of$1
4pe
run
itan
dan
outp
utof
150
unit
s—
poin
tL
.
li2E
QIK
Nl’t
SF01’IIESIJI
BI.IS
tiritiW
ill[cm
ito
mm
iakeri,iI
amiorimial
priilit
orcreak
ew
li.T
hus,as
sliowci
Inpoint
E1.iii
Figure10.2,
the
firmreach
eslong—
riiii
eqicilibmuin.
Entnand
exitinto
theicid
istnstabilizes.
liipractice,
however.
suiiwfirm
scilay
cimtcine
toci cake
more
dan
anon
ialprofit
ortake
aloss
overdie
long
nm
.F
imis
iimay
beable
tod
ifferentiate
tlid
jrodiict
tosuch
anextem
itth
atcoim
ipetito
rscanm
iot
eqima! tlieimc fbra
longtim
eA
List—food
restaurantm
ayhave
theonly
locationopposite
thenuti n
entraiiceand
exitof
acollege
orhus
station,for
exanmple.A
certainbrand
offootw
earor
clotliiimgm
ayhave
devebiped
strongconsum
erlovalh’.
On
timeother
hand,.soi
iw
Iirms
may
notm
oveout
ofan
indtistneven
thoughthey
areincurring
ecomuinc
lossesin
thelong
run.A
small
storekeeperm
ayrem
ainin
bnsinessbecause
sheo
rhe
isunw
illingor
tniab
leto
move
intoan
oth
er
iiidustn
c
oN
on-Price
Crnnpetition
Sincethe
long—m
nprospect
ofnionopcilistically
cool—petitive
firms
isto
realizeomik
an
orm
alp
rofit,
anti
sincethey
haveommlv
Iinotedcontrol
overpnce,
theyattcmmmptto
gainau
advantagetim
nouglinon—pnce
com
petitio
n.
ks
we
haveseen,
threen
iajo
rfa
cets
of
icon—
price
ecui ip
etition
areFnther
pro
du
ctdull’rentiation.
productdevelopm
ent.aTid
advertising.Let’s
considerthem
more
closel
(I)P
nu
/uct
(lift; ‘rnitmtz, nc
Frothict
diIleremitiatiom
offers
thenioim
opolisticallveonipetitivefirm
some
delin—ite
advan
tages.
itcan
buildcoiistm
nierloviL
ltyan
dtlitis
pn,tect
tImefin
iiro
nnew
eo
nm
petition.It
may
alsocc
mlm
ncecustom
nerstlmat
thep
roductis
worth
icicirethan
itsccinpetitors,
andthe
firniw
illbe
alileto
raiseits
pnc’c’s.C
onpared
tothe
standardizedprcnliict
ofperfectly
competitive
firms,
differentiatedprodncts
alsohetter
.IccoT
ilnm
cnlate
thetastes
andprelerticces
ofco
lisililiers.T
helarge
cimnim
berof
differen
tpro
ducts
and
tIme
barrag
eof’
aclvertisiig
inhwnm
atioumm
ay.1m
w—ever,
liesic
great
asto
ecumhise
consu
mers.
iiP
nid
sut
4‘nit,nim
, ‘cm!T
he
driveIIa
procIiict
clirlertm
itmiction
umma.in
snimmecases.
leadto
productiim
lpmveum
meuit.
\iouiucpmm
listic.cllco
mpetitiv
eliu’imms
have
•.
time
immcentiveto
takeadvantage
of’new
tecinmoicm
gfor
pro
duct
iiiiprovenieumts,
sincethey
umcavthus
gaina
largerm
arketshare.
Comustcmmmer (leuulamidIamid
thedrive
toward
differentiationhas
broughtus
foodsprocessed
vitliless
sugarand
fit,for
e.xanuple.Sonic
“iuimprove—nients
however,
may
hem
erelysuperficial.
with
umoreal
advantageover
earlierversions.
iii) Adcciliss;m
gA
dvertisingcan
heused
toeniphas—
Piethe
differencesbetw
eenthe
firm’s
productamid
theothers
inthe
market,
clanS’its
advantages,prom
otea
highprofile
among
consumers,
ariddevelop
strongconsunm
erloyalhc
Inso
nic
eases,how
ever,a
strongad
vertisin
geau
iipaig
na
lesserpro
duct
over
bette
raltern
atives.
Fig
ure
10.3M
onopolistic
com
petitio
nan
dperfect
com
petitio
nco
mpared
Coa0‘CCza000-
100200°
Quantity
(units)
Long-run
equilibriumfor
them
onopolistically
competitive
firmat
E.
Isabove
andto
theleft
ofthe
long-runequilibrium
ofthe
perfectlycom
petitivefirm
atE.g.
The
monopolistic&
iycom
petitivefirm
,therefore,
producesfew
erunits
(150vs.
220)at
ahigher
price($14
vs.$13)
thandoes
theperfectly
competitive
firmover
thelong
run.
2015p
ii—
13—
P.C
10
Qac’
0
1’MR
Q.
300
oE
rnci
enr-
’in
Monopoli
stic
allv
Com
peti
tive
Mar
kei
LAs
we
saw
inC
hapt
er8,
per
fect
com
pet
itio
nm
aybe
used
asa
iiie
ilsu
reof
eifl
ciei
icv
for
oth
erm
arke
tst
oic—
hire
s.To
achi
eve
pro
du
ctiv
eF
ffic
ienc
\th
eref
ore.
pri
ceuii
ist
equal
min
imum
aver
age
tota
lco
st.
Fo
r
allo
cati
ve
eflic
ienc
v.pr
ice
mus
tequal
mar
gin
alco
st.
Fig
ure
11)3
prr
nid
es
aco
mpar
ison
of
monopoli
stic
and
per
fect
com
pet
itio
n.
TIme
eqiu
libnii
mfo
rtl
ieni
cmii
opoI
isti
cdIv
cnii
ipet
itn’e
finm
iin
the
long
mu
(E,,)
ISal
love
and
totl
iele
ftof
the
long
—ni
iieq
uil
ilin
urn
for
the
per
fiti
lvco
mpe
titiv
efi
nn(E
1.).
The
inon
opol
isti—
calI
coni
petih
vefir
mpr
oduc
esfe
wer
good
s(1
50un
itscc
.22
0un
its)
ata
high
erpr
ice
(814
tc.
$13)
than
does
the
perf
ectly
co
mp
eti
tiv
efir
m.
Cle
arly
then
,the
mon
o-
poli
stic
allv
com
peti
tive
inis
less
effi
cien
tth
anth
e
perf
ectl
yco
mpe
titi
veve
rth
elo
ngnm
.It
can
bear
tued
that
iw
ew
ere
toIm
alvc
the
iiiim
beol
riio
nopo
list
ical
h’co
mpe
titi
velIr
Tns
sell
ing
atpr
ices
abov
em
argi
nal
cost
,pr
ices
coul
dbe
cut
aiid
effi
cien
cy
impm
rd.
For
exam
ple.
ifw
e;‘
ere
tocu
tsi
giiif
icai
itlv
the
num
ber
ofre
tail
stor
esor
smal
lre
stau
rant
s,or
the
larg
eva
riet
yof
slur
tor
shin
est
yles
,co
sts
and
ther
efor
e
pric
esco
uld
becu
tan
dit
seem
sth
ecusto
mer
wou
ldbe
bet
ter
oft.
How
ever
,cu
ttin
gth
enum
ber
offi
riiis
also
redu
ces
the
div
ersi
hof
pro
du
cts
and
sho
pp
ing
co
uv
en
ieT
ice.
Som
ew
ould
argu
eth
atth
eco
nven
ienc
ean
ddi
vers
ih
are
wel
lw
orth
the
slig
htly
high
erpr
ices
we
have
topa’
inm
on
op
oli
stic
ahlv
com
pet
itiv
ein
dust
ries
.
.
DD
DD
CO
Conce
ntr
atio
nin
Can
adia
nIn
dust
ry
How
muc
hco
ncen
trat
ion
isth
ere
inC
anad
ian
indu
stry
?A
t
first
glan
ce,
itm
ayap
pea
rth
ata
sim
ple
cou
nt
ofth
e
num
ber
0!fi
rms
inan
indu
stry
wou
ldpr
ovid
ean
answ
er
and
indi
cate
whe
refir
ms
fiton
the
mar
ket
spec
trum
.B
ut
supp
ose
one
indu
stry
has
five
firm
sco
ntro
lling
aneq
ual
shar
eof
the
enti
rem
arke
lan
dan
othe
rin
dust
ryw
ith21
firm
sha
son
efir
mco
ntro
llin
g80
per
cen
tof
the
mar
ket
Evi
dent
ly,
the
seco
nd
indu
stry
has
ag
reat
erco
ncen
trat
ion
des
pit
eth
ela
rger
num
ber
offi
rms
Eco
nom
ists
have
,
ther
efor
e,dev
eloped
conc
entr
atio
nra
tios
.A
con
cen
tra
tion
ratio
isth
eper
centa
ge
ofto
tal
mar
ket
sale
sfo
rth
efo
ur
(or
eigh
t)la
rges
tfi
rms
inth
ein
dust
ry.
For
exam
ple.
the
four
larg
est
firm
sin
Can
ada
prov
ide
alm
ost
g9pe
rcen
tof
tota
lsa
les
into
bac
copr
oduc
ts.
In
cons
truc
tion
sate
s,on
the
othe
rha
nd,
the
four
larg
est
firm
ssu
pply
only
2.2
perc
ent
ofth
em
arke
t.
Whe
nco
nsid
erin
gco
ncen
trat
ion
rati
os,
itis
impo
rtan
tto
kee
pth
esi
zeof
the
mar
ket
inm
ind,
The
rati
osar
eb
ased
onth
ena
tion
alm
arke
t,bu
tth
em
arke
tb
ra
prod
uct
may
in
fact
bere
gion
alor
inte
rnat
iona
lT
heco
ncen
trat
ion
rati
os
inth
ece
men
tan
dn
ewsp
aper
indu
stri
es,
for
exam
ple,
are
low
but
the
mar
ket
pow
erof
firm
sin
thes
ein
dust
ries
is
oneti
ele
ssco
nsi
der
able
Few
Can
adia
nci
ties
have
mor
eth
antw
one
wsp
aper
sSi
mila
rty.
high
tran
spor
tatio
n
cost
sdi
vide
the
cem
ent
indu
stry
into
anu
mbe
rof
regi
onat
mar
kets
inw
hich
ther
ear
ety
pica
llyon
lya
few
firm
s—
each
with
cons
ider
able
pow
erto
infl
uenc
epr
ices
The
mar
ket
for
the
auto
mob
ilein
dust
ry,
onth
eot
her
hand
,is
inte
rnat
iona
l.Fo
urfir
ms
acco
unt
for
abou
t90
perc
ent
ofth
eca
rsso
ldby
Can
adia
npr
oduc
ers,
but
they
mak
eup
am
uch
smal
ler
prop
ortio
nof
tota
lC
anad
ian
car
sale
s.Ja
pane
se,
Ger
man
,an
dSo
uth
Kor
ean
auto
mob
ile
com
pani
esm
ake
upm
uch
ofth
edi
ffer
ence
.
As
Figu
re10
.4sh
ows,
conc
entr
atio
nra
jios
vary
con
sid
erab
lyin
Can
ada.
Inag
ricu
lture
,ex
cept
whe
rego
vern
men
isu
pply
man
agem
ent
has
crea
ted
lega
lm
onop
olie
s.
conc
entr
atio
nra
tios
are
low
—ab
out
that
ofpe
rfec
tco
m
petit
ion
Inot
her
indu
stri
es,
such
asto
bacc
oan
dp
etro
leum
,ra
tios
are
very
high
.In
man
ufac
turi
ng,
four
firm
s
cont
rol
abo
ut
half
ofsa
les.
Inth
ere
tail
and
serv
ice
indus
trie
s,es
peci
ally
inla
rge
tow
ns,
the
ratio
sar
elo
w.
Con
cent
ratio
nra
tios
inC
anad
aar
ehi
gher
than
thos
ein
the
US
beca
use
the
mar
ket
issm
alle
r.H
owev
er,
the
Can
a
dian
mar
ket—
espe
cial
lysi
nce
the
Free
Tra
deA
gree
men
t
with
the
US
—is
muc
hm
ore
open
tog
oo
ds
pro
duce
din
othe
rco
un
trie
sth
anis
the
US
0C0,
0
U,
tC
•0a,Ua,a,toC
toEI
a,a,a,C,
0,a,•0CC,Iz0
.0“Ia,C,to
C,
0
a
C,
U,
C
I!IDI0
o a,o
C
a,E
C,a,o 0
C,
0a,
I0
oCD
C,0E
HH
CC
o a,
C,—CC,a,.
02I
E 24’O
Ea,a ——
C,—‘CCc
0U
ii
InI
0’I,CC,0tC
‘a•0‘a=‘aC
‘a
‘a
0
04
“aC
In
I‘az24
I I C
I
Iii
-a4
5z
a8“a
‘az4 IC
4I0
C,
I!I
2— -ae 6
34o
C• 2
o 42 ‘a
4La
— I0 “a• 2
U
0 “a ‘a ‘a ‘a
“a U 4331 ‘a I-‘a ‘a
‘a
C —24us I CU
C0
0LaCC4
“at
42C
IO
ligopr”
Oli
gopo
b’is
am
arke
tst
nict
iire
cons
istin
gof
a11
wIa
rie
Iri
IS5(
Ith
atth
eac
tion
sof
an(i
lk’
hrni
dire
ctly
aff
ect
the
deci
suil
lsof
the
othe
rs..!
iisc
iiii
ein
dustr
ies.
firm
snan
nia
nu(a
ctnre
auid
entic
alor
ho
mo
gen
eo
us
prod
uct.
such
asst
eel
oral
uniin
iiim
.T
hes
ein
dti
stnes
ankn
own
asho
mog
eneo
usol
igop
olie
s.In
othe
rin
dust
ries
,th
elir
uns
uIi
ain
aulil
lact
ure
asi
uiiil
arhu
tdi
ffer
entia
ted
prod
uct.
base
din
part
onpa
ckag
ing.
shli
ng.
etc.
Exa
mpl
esar
etil
eci
gare
tte,
liou
isel
iold
appl
ianc
e,an
dan
tom
oin
lein
dust
ries
. The
sear
ekn
own
asd
iffe
ren
tiat
edol
igop
olie
san
dar
eni
ost
com
mon
inin
dust
ries
that
sell
thei
rpr
odnc
tsin
the
reta
ilm
arke
t(r
ather
than
whole
sale
toot
her
indu
stri
es).
CC
har
acte
rist
ics
of
Oli
gopo
lies
The
key
char
acte
rist
ics
ofol
igop
olis
ticni
ark-
ets
are
kU
finn
s,in
terd
epen
dent
pric
ing,
and
entn
bath
ers.
Let
sex
amin
etI
iese
inm
ore
deta
il-
AF
ewL
arge
Fin
ns
Vhi
leth
ere
may
hem
ore
than
two
orth
ree
firm
sin
anol
igop
olis
ticin
dust
afe
wla
rge
firm
ssi
llhe
dom
inan
tan
dpr
odnc
ea
sign
ific
ant
prop
ortio
iiof
the
tota
lin
diis
tnt
oidp
i it.
Can
ada
has
anu
mbe
rof
smal
l.inc
le—pe
nden
tce
men
tpro
duce
rs,
for
exam
ple.
but
the
vtst
nia
ontv
ofce
men
tis
prod
uced
liva
few
larg
efir
ms.
Siin
ilarly
cw
hile
ther
em
ayhe
man
ydi
ffer
ent
taxi
firui
isin
acih
ifon
lya
few
flrTn
sha
vea
licen
ceto
serv
ice
api
iiic
ular
area
such
asth
eai
rpor
t,th
ese
finn
sar
eol
igop
olis
ticin
that
area
.T
heke
yis
not
the
tota
lm
ini h
erof
Bru
ns,
but
the
actu
alnu
inbe
rco
nsum
ers
have
toch
oose
frou
nii
ia
give
nar
ea.
Inte
rdep
end
ent
Pri
cing
Sin
ceon
lya
few
finn
sdo
Tilin
ate
the
indu
stry
,eac
hon
eha
sso
nic
cont
rol
over
pri
ce—
thus
dis
tin
gu
ish
ing
the
olig
opol
yfr
ompu
ire
com
pet
itio
n.
How
n-er
,un
like
tlit
iiin
nopi
ilis
tth
eol
igop
olis
t’s
cont
rol
over
pri
ceis
lini—
lied.
The
acti
ons
olo
ule
olig
opol
ist
aFle
ctth
eot
hers
inth
ein
clns
tn.
soth
aiea
chfI
rmca
nnot
set
pric
esiu
idt—
pei
id’n
tlv.
Inco
nsi
der
ing
vli
ere
Pi
set
pric
es,
each
uiiu
istco
iisi
cler
how
itsri
vals
will
reac
t.
For
exam
ple.
supp
ose
—la
rge
(irn
is—
WX.\
and
Z—
have
appro
xini
atel
vc—
quar
ter
each
of
tlie
mar
ket
for
prc
;dii
ct
F.If•
cuts
itspr
ices
,it
ilh
gain
a
larg
ersh
are
ofth
em
arke
t.B
ut\‘
com
pet
itors
X,I
amid
1w
illbe
dire
ctly
and
adve
rsel
yal
Thct
edliv
W’s
acti
ons.
Thei
rsa
les
and
prof
its
will
decl
ine
unle
ssth
e’re
act
1wcu
ttin
gth
eir
pric
esto
mat
chW
Th,
or1w
cutt
ing
them
even
furt
her
belo
w\V
\pr
ices
tost
art
apr
ice
war
.A
nd,
ofco
nrs
e,al
lth
ree
finn
sm
nano
tre
act
inth
esa
me
va-.
No
part
icul
arp
att
ern
issu
re.
Cle
arly
.th
en,
nooh
igop
olis
tw
illcu
tpr
ices
with
out
givi
ngca
refu
lco
nsid
erat
ion
toth
epo
ssib
lew
ays
inw
hich
othe
rol
igop
olis
tsin
the
sam
eiii
clns
tn’
may
reac
t.M
oreo
ver,
ther
eis
now
ayof
know
ing
befo
reha
ndho
wol
igop
olis
ticco
mpe
titor
sw
illre
act.
The
situ
atio
nfa
ced
1wth
eoh
igop
olis
tis
like
that
face
d1w
the
play
ers
iiia
gam
eof
poke
r orc
hess
.The
reis
noof
know
ing
liefo
reha
ndho
wto
play
your
card
sor
mov
eyo
urch
ess
piec
es—
itde
pend
son
the
actio
nsof
the
othe
rpl
ayer
orpl
a’er
s.T
his
mut
ual
inte
rdep
ende
nce
isun
ique
tool
igop
oly.
iure
coni
petit
ion
and
mon
opol
istic
corn
peti
tion,
the
nuni
ler
of
Iiru
mis
sogre
attI
iat
itis
for
the
mis
tpa
rt
unne
cess
ary
toco
nsid
erco
mpe
titor
s’re
actio
nsto
one’
sde
cisi
ons.
For
the
mon
opol
ist,
itis
unne
cess
an’
fort
hesi
mpl
ere
ason
that
ther
ear
eno
com
petit
ors.
oW
hyD
oO
ligo
poli
esE
xist
?
W’h
vis
itth
atce
rtai
nin
dust
ries
are
com
pose
don
lyor
mai
nly
ofa
few
larg
efi
rms?
The
reas
ons
are
tIre
econ
omie
sof
scal
e,ha
rrie
rsto
entr
y,
and
the
urge
ton
iere
.
Eco
nom
ies
ofS
cale
The
econ
omie
sof
scal
em
aybe
such
that
itis
inip
ossi
—
hie
for
mor
eth
anon
lva
few
fim
isto
mak
ea
prof
itin
man
yin
dust
ries
.T
heco
sts
ofes
tabl
ishi
ngau
anto
nio—
bile
prod
uic
hon
oper
atic
inco
nip
lete
with
coIn
piit
‘riz
ech
and
roro
tic
syst
ems,
for
exam
ple,
requir
esln
nid
reds
of
mil
lion
sof
dolla
rs.
Onl
yla
rge
firm
sca
nif’
hrcl
ihie
se
expe
irdi
tuIr
esam
1p
rod
uce
eta
iiug
imto
keep
cost
sdo
wn
and
mak
ean
adeq
uat
ere
tum
or.
Man
y’(m
ligop
olis
tic
mdu
stne
son
gnia
llvin
clud
eda
larg
eui
cini
her
oftE
rms
whe
nth
elev
i-IuI
tecl
iund
ngv
illun
ved
ku-
econ
nuili
esof
.
hitSIE
\FLSI’
uI
TIEStILH
CE
S
scale.I lo
wn
er.w
ithtecliinilugical
np
nn
enien
ts.
t’CO
IIOIIIIU
S(II
ScaleiIici’eL
sedL
ilidIIILL1IV
brin
sw
ere
forcedm
it(If
tileindustnc
‘riteittilillie
ro
flions
became
fnver
an
dfew
er.In
Ilieearls’ days
of[he
Canadian
automobile
iiidus—tn,
forexam
ple,[here
were
asm
anyas
80firm
sin
production.In
thetw
entiethcentu
nm
a.ssproduction
techniquesand
thehuge
expendituresrequired
toestablish
acom
pleteasseinbh
linereduced
thenuin—
herof
firms,
sothat
todayonly
threefirm
sm
ake90
percentofthe
North
Anierican—
prodiicedautom
obiles.T
hesteel
andpetroleuni
industriesven
tthrough
asim
ilarprocess.
Barrie
rsto
En
tryIn
additionto
theecononues
ofscale,
on
ierslup
ofpatents
orspecial
licences,control
ofessential
rawm
aterials,and
knowledge
ofproduction
techniquesby
existingoligopolies
alsoact
tobar
would—
beentrants
tothe
industn
The
largeexpenditures
requiredfor
non—p
nce
competition
suchas
advertising,particularly
inthe
cigaretteand
cosmetic
indtistnes,m
ayalso
actas
abarrier
toen
tlyIn
addition,consum
erloyalty
tosom
eproducts
may
beve’
thifficultto
dislodge, evenw
hena
newproduct
offersseveral
advantages.
The
Urge
toM
ergeF
iriiisstand
togain
considerablyin
merging.A
merger
isthe
joim
ng
or
coiiib
inatio
nof
two
orm
orebusiness
enterprisesinto
asingle
enterprise.M
ergersuniv
bebarriers
tocom
petitionw
henthey
givethe
merged
firma
greaterm
arketshare,
increasedcontrol
overprice,
andgreater
economies
ofscale.
The
firm’s
increasedsize
may
alsogive
itthe
power
todeniand—
andget—
lower
1Jric
fromits
suppliers.It
cantake
advantageof
discountson
Iiigli—volum
eorders.
Sotic
firms
may
alsoIlierge
with,
orbuy
out,new
coin
peti—
torsthat
enter
theiiidtistiy
UP
ricean
dO
utp
ut
Decisions
Itiin
irex
aiIutiation
ofpurely
conipetitive
and100110—
p1ym
arkets.we
were
ableto
gaina
relativek’clearidea
ofhow
firms
iiithese
markets
iiiaketheir
pi’a’ingand
oliLpilh’cisioiis.T
hesedecisions
foruliwipolies. lun’—
..
ever,
areless
clear—cut.
i\vo[LuLors
tliitm
ake11w
behaviourUI
oligopoliesm
orecom
ple
xale
theliltitiliL
linterdepem
idemice
offirm
san
dthe
varietyof
market
situations.
I)M
istrialsntcrdepeiidersce
As
we
haveseen,
with
onlya
fewfirm
sin
theindustnc
nofIrT
ncan
predictw
ithcertainty’how
others‘sill
reactto
changesin
price.If
afirm
raisesits
pnce.it
cannotbe
surethat
othersw
illfollow
itslead.
Ilitlow
ersits
priceto
gain
sales,it
cannotbe
surethat
otherssiIl
not
alsolow
ertheir
prices—thereby
negatingits
advantage.Consequentl;
theoligopohistdoes
notknow
theshape
ofthedem
andcurve
itfaces.
(ii)V
arietyof
market
situationsW
ealso
saw
thatoligopolies
includeindustries
which
may
betightly
dominated
bytw
oor
threefirm
s,or
loosely’sharedby
sixor
sevenfirm
s.In
addition,oligopolistic
industriesm
ayproduce
eitherstandardized
or(hilerelitiated
goods.In
some
cases,firm
sm
ay
becollildiTig
tocontrol
pricesand
outp
uts
andin
othercases
not.C
learkcthe
varie
tyof
market
situationslilakes
itdifficult
tofit
alloligopolies
intoa
single.all—
encompassing
patternof’
behiaiour.W
hatcan
we
sum
mariz
eabout
pricesin
oligopolym
arketsthen?
Two
key’characteristics
arethat
they’tend
tobe
“sticky,”and
thatw
henone
firmchanges
itsprice,all
Finnstend
toIblIow
inunison,
By“stic’hq;”
we
mean
thatpricesw
ideroligopoly’tend
tochange
much
lessfrequently
thanunder
otherm
arketstnictures.
Inthe
tLutoniobileiiidustm
v,for
example,
pncesgenerally
areset—
ofte
nby’ allfirm
satonce—
atthe
beginningof
them
odel‘ear.
They’are
usuallyadjusted
onlyoc’ca—
sionallvand
ofte
nalm
ostsim
ultaneouslyth
rou
gh
ou
t[lie
year.P
ricesof
tIme9
93
models
ofalluianuflm
ctur—ers,
forexam
ple.isinillv
droptow
ardtIme
cid
ofthe
yearoncethe
new
1994m
odelsare
available.The
finnsare,
therefore,not
at
them
ercyo
fa
sharpdrop
inprices
asa
resultof
reduceddem
and.
lfdein
an
ddro
ps,
manufacturers
will
genc’rallycut
productionrath
erLhan
price.If
theycñt
price,all
finnsill
likely’also
I tave
tocut
pricesand
alllw
ouldlost’
profits.O
hgopolists.thereflire,
are“price—
seekers.T
hin’canim
otset
pricesas
liolmopolists
can,am
althe
lIIaI’kLt I
m €0 0 ‘C C 0 a 0 U 0. ifth
eo
lig
op
oli
stic
firm
low
ers
its
pri
cefrom
$5to
$3per
unit
and
oth
erfi
rms
inth
ein
du
stry
foll
ow,
then
sale
sm
ayin
crea
sebut
tota
lre
ven
ue
(pri
cex
qu
anti
ty)
fall
sfr
om
$45
to$3
3.If
,how
ever
,th
efi
rmrais
es
Its
pri
cefrom
S5to
$6per
unit
and
oth
erfi
rms
do
not
toil
ow
suit
,to
tal
rev
enue
decre
ase
sfr
om$4
5to
$35.
Sin
ceto
tal
reven
ue
decl
ines
whe
npri
ces
are
rais
edo
rlo
wer
ed,
pri
cew
ill
ten
dto
rem
ain
fix
edat
$5pe
runit
—at
the
kink
,K
.
DE
MA
ND
RE
VE
NU
E
I2
34
5
PA
CE
P10U
611’I
TY
TO
TA
LM
WS
FJ4
VA
PG
IFI
DO
LL
AR
S)
DE
I.It
.,1
9E
0{O
)R
EV
EN
UE
(IN
)R
EV
EN
UE
)F.iR
)R
EV
EN
UE
(IN
UN
ITS
)(I
ND
OL
LA
RS
)(I
ND
OL
LA
RS
)P
ER
UN
IT
(III
DO
LL
AR
S)
73
21—
—
66
3615
5
59
459
3
410
405
.5
311
33-7
-7
212
24-9
-9
The
non-c
oll
usi
ve,
dif
fere
nti
ated
oli
go
po
list
does
not
gain
bya
cut
inpri
ceb
ecau
seco
mpet
itors
will
also
cut
thei
rpr
ice
tom
atch
soth
atno
ten
ough
addit
ional
unit
sca
nbe
sold
toin
crea
seto
tal
rev
enu
e.if
the
oil
gopoli
stin
crea
ses
pri
ce,
com
pet
ito
rsw
illle
ave
thei
rp
rice
su
nch
ang
edan
dth
eh
igh
erpri
cew
illm
ean
few
ersa
les
and
thus
low
erto
tal
reven
ue.
The
non’c
oii
usi
ve,
dif
fere
nti
ated
oli
gopoli
st,
ther
efo
re,
face
sa
kink
edd
eman
dcu
rve.
does
no
tes
t”’s
Iith
epr
ice
br
them
asti
nder
perf
ect
cm
npehti
on\
icti
flce
rtai
nly
the
face
mea
nsth
atth
eyin
iist
scar
e!i
Iir
auecp
iiiih
riti
mp
rice.
Tiny
,(lie
n.a
reth
en’
inar
kal,I
vst
able
pric
esof
olig
o—1h
esta
hil i
slie
d?O
neex
plan
atio
nis
tile
tlie
on
ofth
ebi
iked
(leI
IiaI
l(l
ctin
’e,
CT
he
Jun
ked
Dem
and
Cu
n’e
ifth
ere
isno
collu
sion
or
info
rmal
agre
emen
tam
on
gohig
opoli
stic
firn
iseconom
ists
e9ii
ail
tth
epri
ce
“st
icki
ness
lisi
lig
(lie
mod
elold
iekin
ked
dem
and
vu
n’e
.
.
Fig
ure
10.5
The
kink
edd
eman
dcu
rve
ofth
eno
n-co
llus
ive,
diff
eren
tiat
edoi
igop
oils
t
Suppose
oii
are
on
em
rla
rge
oli
gopobst
icfI
rms
inal
lm
diis
t n’.
Tabl
e1
outl
ines
the
dem
and
and
reven
ue
sehi
edi t
ies
for
‘ou
rpro
dncl
ü-t
5HS
SLI t
ile
VO
lt
are
curr
entl
yse
llin
g9
unit
sat
S’S
per
wil
t.T
he
dem
and
clim
efo
ry
ou
rpro
duct
wil
lh
ek
ink
ed.
assh
ow
nin
Figu
re10
.5.
iiy
ou
rco
tiupe
btor
sbe
have
inth
elol
low—
lug
W’\
S.
Eco
nom
ists
assu
me
thes
eto
helik
ely
reac—
hons.
(I)‘
uI(
‘III
’p
rices
and
!fO
hIr
ciln
ipet
itc’n
iiia
trli
your
pnrc
cut
Ifyo
ncu
tyo
urpri
ces,
yo
ur
coti
ipeht—
ors
mus
tm
atch
your
pric
ebec
ause
they
dono
t“an
t
von
tota
keaW
ayth
eir
cust
omer
s.F
orex
ampl
e,su
p—
po
se;‘o
iucu
t‘o
nrpri
ce
front
S5to
.33,
Whi
leti
le
num
ber
of
un
its
‘oiu
sell
incre
ase
sfr
om
9to
1).
yo
ur
tota
lre
venu
e(p
rice
xquan
tity
)dec
reas
esFr
om$4
3($
5x
.39)
to.3
33(8
3s
.311
)be
caus
eyo
urco
mpe
titor
sha
vem
atch
edyo
urpr
ice
cut
and
yon
cann
otse
llen
ough
addi
tiona
lun
itsto
incr
ease
von
rpro
fits
.
(ii)
Th
ura
ise
your
pric
ean
dour
com
peti
ton
hacc
’
thei
r iti
cc’
inic
lianued
lim
ora
ise
yo
ur
pri
ce
froni
85
to86
per
unit,
your
com
petit
ors
see
‘ou
rpr
ice
incr
ease
Ela
stic
dem
and
(as
pri
ce
increases,
tota
lre
venu
edec
lines
)
DIn
elas
tic
dem
and
(as
pri
ced
ecli
nes
,to
tal
reven
ue
dec
lin
es)
10 8 6 S 4 3 2K
inke
ddem
and
cur y
eD
IKO
I
Tab
le10
.1D
eman
dan
dre
ven
ue
sch
edu
les
for
the
non-
coll
usiv
e,di
ffer
enti
ated
olig
opol
ist
II
II
02
46
810
1112
Qu
an
tity
Ig,
(C\T
I_S
iC)[
IIES
OL
BuG
s
asa
greatopportunttv
toicrease
theirshare
oithe
market
atyour
expense.T
ltntherefore,
leavetheir
pricesunchanged.
Asshow
nin
Table
10.1m
idFigure
10,5,w
itha
priceincrea’ e
from.35
to$6,
qtiantih’dem
andeddecreases
from9
to6
units.Y
ourtotal
revenue,therefore,
decreasesfrom
345to
$36.To
summ
arize,itseem
sreasonable
toassum
ethat
ifyou
cut prices,your competitors
followyou.
Ifyouraise
prices.i’our
competitors
slayput.
Thus,
youface
akinked
demand
curve.‘ith
thisdem
andcurve,
what
shouldio
udo?
The
most
likelyansw
eris
toselect
pointK
inFigure
10.5,w
herethe
kinkoccurs.
Iiiother
words,you
shouldstay
with
theexisting
price(35
perunit)
andoutput
(9units).
With
thisstrate’,
youdon’t
upsetyour
corn—petitors,
vonkeep
yourshare
ofthe
market,
andyou
probablym
aximize
profits.
IDP
rofit
Maxim
ization—T
heM
R=
MC
Rule
Figure10.6
confirms
that35
perunit
isthe
priceat
which
profitis
maxim
ized.T
hedem
andcurve
forthe
1kmis
DK
D1,
reproducedfrom
Figure10.5.
\Vhat
isthe
marginal
revenuecun’e
appropriateto
thisdem
andcurve?
For
theD
7Ksection
ofthe
demand
curve,the
correspondingm
arginalrevenue
(MB
)cun’e
isR
S.W
henw
ereach
thekink
atK
andm
ovealong
thedem
andcurve
KD
1,the
correspondingm
arginalreve
nuecurve
isT
U.
Due
tothe
sharpdifferences
inelasticity
between
D2K
andlhe
KD
1segm
entsof
lhedem
andcurve,
agap
ocenrsin
theM
Rcurve
between
Sand
T.W
etreat
thisas
avertical
sectionof
theM
Rcurve.
Asw
ecansee,NIH
=M
Catanoutputof9units.
Even
with
largeshifts
inm
arginalcost
alongthe
vertical segment ofthe
MB
curve,output willrem
ainat
9units
andprice
at$5
perunit.
Thus, price
andoutput
arelikely
torem
ainstable
atthe
Hnk.
Problem
sw
iththe
Kinked
Dem
andC
urveT
hetheory
ofthekinked
demand
curvedoes, how
ever,leave
soittequestions
nnanswered.
First,how
isthe
priceestablished
tobegin
with?
The
kinkedcurve
eaplainsw
infirm
schoose
theexisting
price,bitt
nothow
or‘vhv
itw
asoriginally
set,Sec(,lld,
pricesin
realityare
notnearly
asinflexible
asthe
theonsug—
..
Fig
ure
10.6P
rofit
max
imizatIo
nby
the
MR
=M
Crule
forthe
non-collusive,differentiated
ollgopolist
00VCzaSUI-a
11I4O
utput(units)
Where
thedem
and
curveof
theolig
opolist
isklnked—
atan
outp
ut
of9
units—the
MR
curv
eis
discontinuous(the
do
ttedline).
Thus,
onlya
verylarge
Increasein
costs
(andco
nseq
uen
tshift
Inth
eM
Rcurve)
couldInduce
theoligopolist
toraise
prices.
Moreover,
noreduction
inco
stsw
ouldInduce
theoligopollst
tolow
erprices,
sincelow
erprices
mean
lower
profits.T
hus,once
set,ollgopolistic
pricestend
torem
ainstable.
ProfitIs
maxim
izedat
anoutput
of9
unitsand
aprice
of$5
perunit.
t,i
gest
s.Ph
cy—
&tf
auto
mo
bil
es,
kr
exan
Iple
,do
“a’.
You
have
pro
bL
’no
ticed
pnce
incr
ease
s—an
dpr
obab
lym
ore
rare
ly—
pric
ede
crea
ses
from
tiine
-to—
tiiiie
.M
anul
lict
urer
sm
ayof
fer
pric
ere
bate
s,lo
wer
inte
rest
rate
son
loan
s,or
addi
tiona
lfe
atur
essu
chas
air
coiid
i—tio
mng
.fo
rex
ampl
e—al
llo
wer
ing
the
set
pric
e.
ElO
ther
Exp
lana
tion
sfo
rO
ligo
poli
stic
Pri
ces
Inad
ditio
nto
the
theo
ofth
ek-
inke
dde
man
dcu
rve,
the
‘stic
ky”
pric
esin
olig
opol
isfic
indu
stri
esm
aybe
expl
aine
db’
collu
sion
,pr
ice
lead
ersh
ip,
and
taci
tag
reem
ents
amon
gfir
ms.
Col
lusi
onT
hesm
all
num
ber
offi
rms.
thei
rm
utua
lin
terd
epen
denc
e,an
dth
eba
ffle
rsto
entr
yin
olig
opol
istic
indu
str
ies
are
all
cond
uciv
eto
collu
sion
.C
ollu
sion
isan
agre
emen
tam
ong
finn
sto
fixpr
ices
orou
tput
,or
todi
vide
the
mar
ket.
The
adva
ntag
esar
ecl
ear—
the
end
ofun
cert
aint
ies
and
high
erpr
ofits
.W
hat
pric
ean
dou
tput
are
the
collu
sive
olig
opol
ists
likel
yto
sele
ct?
The
answ
eris
the
sam
eon
eth
atth
em
onop
olis
tw
ould
choo
se—
the
one
that
max
imiz
espr
ofits
whe
reM
R=
MC
.T
hefi
rms
gain
mon
opol
istic
pow
ers
thro
ugh
thei
rco
llusi
on.
Col
lusi
onm
ayta
kea
num
ber
ofdi
ffer
ent
form
s.O
neis
the
cart
el.
Aca
rtel
isa
form
alar
rang
emen
tbe
twee
nin
depe
nden
tfi
rms
tofix
outp
utor
pric
esor
todi
vide
the
mar
ket
geog
raph
ical
hcso
that
each
finn
isgi
ven
itsos
mte
rrito
n’.
One
ofth
ebe
st-k
now
nca
rtel
sin
the
wor
ldto
day
isO
PE
C—
the
Org
aniz
atio
nof
Pet
role
umE
xpor
ting
Nat
ions
.In
the
1970
san
dea
rly
1980
s,th
em
embe
rsof
OP
EC
agre
edto
limit
the
outp
utof
oil
and
thus
rais
eth
epr
ice
per
barr
el.
Sinc
eth
em
embe
rco
untr
ies
acco
unt
for
ala
rge
prop
ortio
nof
the
wor
lds
oil e
xpor
ts,
the’
wer
eab
leto
rais
epr
ices
cons
ider
abhc
Inot
her
case
s,co
llusi
onm
ax’
take
the
form
ofan
info
rmal
verb
alag
reem
ent.
Suc
hag
reem
ents
are
ille
gal
inC
anad
aan
dth
eU
nite
dS
tate
s,bu
tth
eir
info
r—ln
alih
’m
akes
them
diff
icul
tto
iden
tify
Agr
eem
ents
byol
igop
olis
tsto
rais
epr
ices
orre
stri
ctou
tput
tend
tobe
unst
able
for
anum
ber
ofre
ason
s.In
som
eco
untr
ies,
coll
usio
nis
illeg
al.
InC
anad
a,fo
r(‘
\ilm
Ple.
Ant
i—C
omlji
mm
esle
gisl
atio
npr
ohib
its
pric
e—
ElEl
El
Coll
usi
on
‘Peo
ple
ofth
esa
me
trad
ese
ldom
mee
tto
geth
er,
even
form
errim
ent o
rdi
vers
ion,
butt
heco
nver
sati
on
end
sin
aco
nspi
racy
agai
nst
the
pubt
ic,
orin
som
eco
ntri
vanc
eto
rais
epr
ices
Ada
mSm
ith,
Wea
lthof
Nat
ions
Are
port
ina
US
mag
azin
ein
1985
outl
ined
ate
leph
one
conv
ersa
tion
that
took
pla
cebe
twee
ntw
o
airl
ine
exec
utiv
esin
1982
.T
heco
nver
sati
onw
as
taped
wit
hout
the
know
ledg
eof
one
ofth
e
exec
utiv
es.
The
conv
ersa
tion
beg
anw
ithth
etw
o
exec
utiv
esdi
scus
sing
how
diff
icul
tit
was
for
them
both
tom
ake
apr
ofit
whe
nth
eir
airl
ines
wer
efl
ying
the
sam
ero
utes
and
cutt
ing
pric
es.
Com
peti
tion
betw
een
them
was
fier
ce.
Dur
ing
the
cour
seof
the
conv
ersa
tion
,on
eex
ecut
ive
sugges
ted
that
the
two
airl
ines
both
rais
eth
eir
pric
esto
geth
er—
clea
rly
soth
atth
eyco
uld
both
mak
ea
heal
thy
prof
it,ra
ther
than
cont
inue
losi
ng
prof
itsby
com
peti
ngag
ains
ton
ean
othe
ron
ever
y
rout
e,T
heot
her
exec
utiv
epr
otes
ted
that
they
shou
ld
not
bedi
scus
sing
pric
esan
din
deed
coll
udin
gto
fix
pric
es.
He
did
not
follo
wth
eot
her
exec
utiv
e’s
sugg
esti
on.
The
US
gove
rnm
ent
accu
sed
the
offe
ndin
gex
ecut
ive’
sai
rlin
eof
atte
mpt
ing
toes
tabl
ish
an
illeg
alm
onop
oliz
atio
n.T
hech
arge
was
late
rse
ttle
d
byth
eex
ecut
ive
sign
ing
anag
reem
ent
not
to
eng
age
inan
ysu
chac
tivi
ties
inth
efu
ture
.
App
lica
tion
s
1.W
how
ould
have
bene
fitt
edif
ther
eha
dbe
enan
effe
ctiv
eag
reem
ent
tofix
pric
es?
Exp
lain
.
2.W
how
ould
the
lose
rsha
vebe
en?
Exp
lain
.
3.W
hydo
go
ver
nm
ents
mak
ep
rice
-fix
ing
agre
emen
tsby
com
peti
ngfi
rms
ille
gal?
.
J1NI
i’*
Il’
\1’I
siii-
iasill
liiF
S
ii\iIlU.L
’41
i’.’ilit-lits.
iiii.’t’iiti’t,’shi
tiit’.ttiii
liii’agitt—
iiitiitiii
,tlSiistiiiiiij.
\\‘iiileiii
Ii’irst’tii
Iit’iii’lil
hir_
,t’tiit—r
in,iiiIi\iiitz
1)iit’rS
LuLlliilt)
iit.the
iiitli’ttlii.ti
miii
(‘jilt,tt_’Illt’U
’(W
itiiiItt’r
j)t’l)fitsil\
t_’iitIttiitt
.111(1
sellingiiot-c-
[intoiii.
quota.F
iiiaiI,the
gi—t’Ith’r
[lit’iltiilti)
er
iiifo’iiis
illtilt’
ilitlIlstfl.tin,
IliOtr
tlificititIt
is
tiIF
ati
Iag
n’u
ite
lits
.
liii’i)i’t’Itktlti\\il
ula
(‘.LItt’i
(II’IIili)Illi,tl
tgie
tiiit’iit
iinn
lesii]t
IIIeiit—
filrisiltiiIiip
t’tltioll
jrp
an’
s’.ti’s.
Cu
t—th
roat
co
mp
etitio
nis
the
saltoF
gutit’sat
i1C
t’S
hub’’the
costol
prothiletiul
iniinli’r
to(lnve
fl\’ti5iiiit
of
hiiiii’ss.
During
pi’iuew
ars.the
inn
uith
theg
n’IitL
st
hiii,in
eia
iri’s
iiiiiut’s
st.tiiths[lit’
I,estch
aiice.
I’riceL
eadershipP
ric
ele
adersh
ipis
thepi’.tc[it’t’
hit’n
’hh
ut’
fin
n
hit’
I’It’t’itd
’ii,
liSilitIi\
thit’bitit’st
ortb
oiu
iitin
t11111
intile
iuhiistn
.ju
tttc
sp
uce
changes
know
ing
[huntititist
titiwrs
will
followsuit.
Liitills
cast’.
inste
ad
of’tliekiiiketl
tlt’illatli.lC
lint’.
1)-K1)1,
\U
laW
the
“ku
kb
’ss
cut-vt’,l)K
iE),
shown
IiF
igu
res
10.5atitl
10.6.
FL’
clifli.’
ISkinkiess
becau
seth
eltu
lCt’Ittlu
ih’
liVt’I
poet’sis
ehiiiiiuali’tl.A
sthe
pout’Ieatit’c
voltw
illset
vtittrplace
Ittthe
poult‘‘ilt_
’ft’p
rofit
isu
lIt.\Iiitii,e(h—
where
MR
=M
CT
hispoi
itis
1jnibabikclose
Iiith
e
priilit—uniuiiiiziuii
t,iut1iiitof’thii’
iiitliustn’.vluIeli
is‘ln
oillt’r
linus
an’
wi
IiILL
tiihllio
wn)tirh
’;L(l.
\tilita
lllit’
ooooua
Th
eC
ase
ofth
eF
lour
Bid
-Rig
gers
Aro
utin
ete
lephone
callan
da
tarfro
mro
utin
e
respo
nse
setin
motion
aninvestigation
lhatled
to
theshffest
linesever
imposed
under
Can
adian
federal
competition
law,
The
investigationbeg
anin
1987w
hena
procurement
man
ager
forthe
lederalD
epartment
of
Supply
andS
ervicescalled
otherfirm
sw
henshe
receivedonly
oneoiler
ona
contractbr
wheat
flour
distributionas
foodaid
toT
hirdW
orldnations.
When
them
anag
erheard
lromone
milling
executivethat
ft
‘wasn’t
theco
mpan
ys
turnb
rthe
con
tract.”sh
e
passed
onthe
intormation
tothe
Com
petition
Triounat
As
aresult,
in1991
three
com
pan
ies
picad
edguilty
tobid-rigging
and
were
finedS
i
million
eachT
hreeother
firms
plead
edguilty
to
pr’ce-lAing
andw
erealso
finedroughly
inproportion
totheir
sizew
iththe
hig
hest
fineat
$225000
Tw
o
add
ition
alfirm
sw
erech
arged
inthe
case
The
charg
esrla
ied
to531
ccnra
cts
totalling
about
5500m
illionb
eeen
1975an
d1g87
when
ne
bid
-r:gg
ing
tookplace
So
me
ofthe
contracts
were
iDlo
rdaid
toco
un
triessuffering
fromtam
inesu
ch
ast1Ie
Su
dan
Chao
and
Ethiopia
The
P‘p
ort
shipments
underthe
foreignaid
contracts
ofthe
Canadian
lnlernatonalD
evelopment
Agency
were
toa
varietyof
othercountries
includingC
hina,
Vietnam
,N
icaragua,L
iberia,and
theP
hilippines.
As
partof
thebid-rigging
scheme,
productionof
wheat
flourw
asm
onitoredby
anational
milling
association,w
hichthen
altocatedhe
confractson
thebasis
ofeach
firm’s
market
shareA
ceilingprice
was
setby
iheassociation,
andthe
company
selectedto
win
thebid
putin
aprice
justbelow
the
ceilingT
heother
companies
bidabove
theceiling
priceor
notat
all
Applications
1.W
hatis
“bid-rigging7”H
oww
asit
carriedout
in
thiscase7
2.S
uggestw
hateconom
iceffects
thebid-rigging
had3.
According
toone
otf’cialat
theC
ompetition
Tribunal,
bid-riggingis
a’particularly
nefariousForm
ofconspiratorial
behaviourD
oyou
agree7W
hyor
why
riot?
..
mfl
cle
nt
thy
’be
othe
run
its
inth
ein
dust
n’w
illse
tiit
esa
me
pri&
_li
iiIta
vese
t.M
ain’
Nort
hA
mer
ican
olig
opol
isti
cin
dust
ries
—su
chas
the
coal
,ce
iiie
iit,
glas
s,an
dst
eel
iid
ust
nes
—ha
vepr
actis
edp1
1cc
lead
ersh
ipfo
rye
ars,
Inth
eau
to—ii
iohu
le11
1(11 t
stn’
.fo
rex
ampl
e.th
edo
nuna
nt
finii
(usu
—al
lyG
ener
alM
otor
s,hu
tso
met
imes
For
dor
C’h
n’sl
er)
anno
unce
sth
epnce
sfo
rit
sne
wni
odel
year
and
the
oth
erfi
nn
sth
enfo
llow
itshe
ad.
Inp
racti
ce.
ho
wev
er,
pri
cele
ader
ship
isno
tal
way
sso
clea
r—cu
t.A
nin
dust
n’
ma’
no
th
ave
only
-one
clea
ran
dco
nsi
stel
itpri
cele
ader
.O
neco
mpan
ym
ayta
keth
ele
adone
year
and
ano
ther
the
next
.S
om
ein
du
stri
es
may
follo
w’a
tent
ativ
e,q’
j—se
arch
ing.
trial
—an
d—er
ror
appro
ach.
On
efi
nn
Tna\
’—dis
eit
spri
ces.
hut
iioth
erfi
rms
do
not
follo
wst
ilt,
ititl
ayc1
uicH
vre
scin
dth
eiT
icre
ase.
Pric
ele
ader
sus
ually
rais
epr
ices
only
occa
sion
ally
beca
use
ofth
eris
kin
volv
ed(o
ther
firm
sm
ayno
tpl
ay“f
ollo
w-t
he-l
eade
r”).
Lar
gepr
ice
chan
ges
are
mad
eon
lyw
hen
ther
eis
asi
gnif
ican
tch
ange
inde
man
do
rco
sts.
The
pric
ele
ader
max
’som
etim
esch
oose
apr
ice
that
does
not
max
imiz
etil
ein
dust
n’s
shor
t—m
npr
ofits
.W
hy?
Low
erp
rice
s(a
nd
slig
htly
low
erpr
ofits
)w
ill
help
diss
uade
oth
ers
from
ente
ring
the
indt
tstn
’an
dw
illm
aint
ain
the
olig
opoh
isti
cst
ruct
ure
.
Fig
ure
10.7
Mar
kets
and
thei
rch
arac
teri
stic
s—a
sum
mar
y
Diff
icul
tOr
impo
ssib
le
.
FEA
TU
RE
SPE
RFE
CT
MO
NO
PO
LIS
TIC
HO
MO
GE
NE
OU
SD
IFFE
RE
NT
IAT
ED
PU
flE
CO
MPE
TIT
ION
CO
MP
ET
ITIO
NO
LIG
OPO
LY
OL
IGO
POL
YM
ON
OPO
LY
NU
MB
ERO
FFI
RM
SM
any
Man
yFe
wFe
wO
ne
TYPE
OF
PRO
DU
CT
Iden
tica
lp
rod
uct
Som
ep
rod
uct
Stan
dard
ized
Dif
fere
ntia
ted
One
prod
uct;
nodi
ffer
entia
tion
(plu
spr
oduc
t;lil
Ileor
nopr
oduc
tcl
ose
subs
titut
esdi
ffer
ents
ervi
ces
prod
uct
and
loca
tion
s)di
ffer
enli
atio
n
TYPI
CA
LD
EM
AN
DP
erfe
ctly
ela
stic
Ouil
eel
astic
IIco
llusi
onex
ists
,Fa
irly
elas
tic;
may
Elas
ticC
UR
VE
FAC
ING
FIR
Msa
me
as
monopoly
be
kin
ked
CONT
ROL
OVER
PRIC
EN
one;
aA
little
Lim
ited
bym
utua
lLi
mite
dby
mut
ual
Subs
tant
ial;
a‘p
rice
-tak
er”
inte
rdep
ende
nce;
inte
rdep
ende
nce;
“pri
ce-m
aker
,”co
nsid
erab
lew
ithco
nsid
erab
lew
ithun
less
pric
eis
pric
ele
ader
ship
;a
collu
sion
orpr
ice
regu
late
dby
“pric
e-se
arch
er”
leaders
hip
;a
go
vern
men
t
“pri
ce-s
earc
her”
CO
MPE
TIT
OR
RE
AC
TIO
NN
one
Lit
tle
Co
nsi
dera
ble
Consi
dera
ble
None
CO
ND
ITIO
NS
OF
ENTR
YE
asy
Eas
yD
iffi
cult
Diffi
cult
IOtA
PRIC
EN
one
Som
e—es
peci
ally
CC
LIP
LT
ITIO
Nad
vert
isin
g
EXAM
PLES
Som
eag
ricul
tura
lRe
tail
trade
,A
lum
iniu
m, s
teel
,pr
oduc
ts,
stoc
kcl
oth
ing,
lurn
itu
recem
ent
Som
eEx
tens
ive
Aut
omob
iles,
cIg
are
ttes,
Adv
ertis
ing
toin
crea
sede
man
d
Tele
phon
e.el
eciri
cal
pow
er,w
ater
serv
ices
mar
ket
com
pute
rs
!It!ill
lEN
TI
sKO
FnI’:so(
nci:s
Tacit
Agreem
ent
Au(itiier
wa
utvliicli
oligopolisticlinus
iiiiivreach
thesaiiie
priceis
inIntalis
ula
tacitor
uiiispokeiiagree—
iiieiit.
For
example.
aretailercould
guessthe
1iriceola
productcouuipetitors
would
chooseif lie
orshe
biewit
would
hein
therange
of$9.50
toS
10.10.T
heprice
would
like!)’be89.95.
Retailers
conniuoniyselectprices
justbelowthe
tipperdollar
range—it
isclose
toS
i 0.00.
hntlooks
like$9.00.
Insonic
industries,certain
pricesniake
sense.T
heyare
lopc’Ll,
andso
thefirm
snatu
rallyagree
onthem
without
anyform
alor
spoken
arraiigei nen
t.
oN
on-Price
Coinpetilion
forO
ligopolies
Like
monopohsticallv
competitive
finns.oligopohsts
alsoplace
agreat
dealof
emphasis
onnon-price
coinpetition,
includingadvertising,
researchand
developuncut,
andservicing.
Often,
ohigopohistsare
inurew
illing
toengage
innon—
pricecom
petitionthan
iiiprice
competition.
Ina
Pri
war,
allfirm
sstain!
tolose
profits.
IIm
perfect
Co
mp
etition
and
Efficiency
Flowdo
firms
inohgopohshc
markets
compare
interm
sof
efficiencyw
ithfinns
underperfect
conipetition—
ourm
easuringstick?
As
we
haveseen,oligopohes
tendto
setpricesabove
thepoint
where
inargiuualrevenue
equalsm
arginalcost.
Thus,
pricesare
higherand
oti4Jtitis
lower
thantinder
perlectcoinpetitum
.It
couldbe
argned,th
ere
fore,that
finnsin
thism
arketstructure
make
excessiveprofits.
Under
perfectcom
petition,price
tendsto
equ nilinarginal
cost,to
thebenefit
ofthe
consumer.
\‘henFinns
areless
subjectto
therigouurs
ofcoin—
petirioii.they
lilaylie
lesslikely
tokeep
costslow
andquality
andservice
high.A
lessefficient
indtistnlila)’
result.1)lizopolistic
firms
areable
tolake
advantageof
ecolIC
ulIu
ieso
fscale
.huw
eter.In
sm
ilecases,
onlya
fewlarge
fInnslo
inlie
ableto
aiflirddie
considerable
initialcapital
e\pellditturesrequired
toen
terthe
indtis—tn.
Iliglioverhead
costsiiiean
thatthe
averagetotal
costcnn’e
declinesover
alarge
amount
Ciioutput.
Prices,tliereflire,uiiav
lieabove
iuiargauialcost,bittthey
may
stillbe
inuchlow
erthan
ifthere
were
many
competing
firms
inthe
industry.F
orexam
ple.if
there
were
many
steeland
automobile
conipaniesin
Canada,
theaverage
costof
producinga
tonneof
steelor
anautom
obilew
ouldprobabh’
beiiiucli
higher. The
small
Finnsw
ouldbe
unableto
takeadvantage
ofthe
eco—nonuies
ofscale
overm
uchof
theiroutput.
Oligopolies,
likem
onopolies.m
ayhave
agreater
incentiveto
investin
researchand
developnientthan
doptL
relvcom
petitiveor
niouopolisticallvcoiupetit—
ivefirm
s,because
theytypicaL
lyare
largerand
havem
oreresources
toinvest.
With
significantbarriers
to
en
tnoligopolies
andm
onopoliesare
alsoin
abetter
positionto
benefitfroui
theirinvestm
entin
pro
duct
development.
IG
overn
men
tP
olicyT
oward
Monopoly
and
Oligopoly
From
ourexam
inationof
theFour
market
structures,it
isclear
thatin
two
ofthem
—perfect
competition
andm
onopolisticcom
petition—individual
finnshave
littleor
nocontrol
overprice
ando
utp
ut
intheir
industries.T
heirm
arketpo’ver.
ino
ther
words,
islim
ited.G
overnments,
therefore,have
littleneed
orincentive
tointervene
iiithese
markets
toprotect
consumers.
How
ever,in
theo
ther
two
market
structu
res—m
onopoly’andol igopolv—
indMdual
Firnis(10
havethe
power
toinfluence
pricesand
output,and
tInspow
erm
aybe
usedto
thed
etrimen
tof
consumers.
Hence,
governuients-act
toregulate
thesem
arketsand
pro—m
otethe
generalinterest
ofC
anadianconsum
ers.G
overnment
policytow
ardnm
onopolies’.imid
oligo—pm
liesfalls
intothree
iuaincategories:
ii)Legislation
topreventthe
reduction(IF
competition.
(ii)R
egulationto
controlor
setp rices
For“im
atural”nm
onupc dies.
..
(iii)P
ublicow
imcrslnpof
naturaln
ionopolies.
Lzc000un
AC
rack
inth
eC
emen
tC
lub
S.
Cem
ent
inO
ntar
iois
abou
tth
etn
ost
expe
nsiv
ein
the
wor
ld.
InT
oron
to,
atth
ebe
ginn
ing
of19
91,
ato
nne
of
Por
tlan
dce
men
tpo
wde
rli
sted
for
abou
t$1
30(U
S$1
10).
Just
acro
ssIh
ebo
rder
,in
New
Yor
kS
tate
,th
esa
me
goes
for
US
$70
Off
shor
e,it
isch
eap
erst
ill.
Giv
enth
atth
em
ain
ingr
edie
nts
ince
men
tar
eli
mes
tone
and
ener
gy,
both
of
whi
char
ein
boun
tiful
supp
lyin
Ont
ario
,th
ehu
gepr
ice
diff
eren
cepo
ints
toan
othe
rpo
wer
ful
mar
ket
forc
eat
wor
k.
Cal
lit
anol
igop
oly
Cem
ent
inO
ntar
io,
and
toa
less
er
exte
ntin
othe
rpa
rts
ofth
ena
lion
.is
cont
roll
edby
four
play
ers
with
mor
eth
an90
perc
ent
ofth
efo
cal
bu
sin
ess
Con
cent
rati
onis
the
natu
reof
the
cem
ent
bu
sin
ess
itsel
f.
Thr
ough
out
the
wor
ld,
aha
ndfu
lof
maj
orpl
ayer
sha
ve
emer
ged
dom
inan
tin
the
indu
stry
,w
ithth
eF
renc
hol
ten
at
the
fore
fron
t.T
his
isa
mat
ure
indu
stry
,w
here
grad
ual
and
expen
siv
eim
prov
emen
tsin
effi
cien
cysu
ppla
ntte
chn
o
logi
cal
leap
sas
the
maj
orde
term
inan
tof
succ
ess.
Hen
ce.
the
barr
iers
toen
try
are
impo
sing
.B
uild
ing
am
oder
n
gree
n-fi
eld
cem
ent
pow
der
plan
tin
Can
ada
coul
dco
st
upw
ards
of$1
50m
illio
nth
ese
days
.In
Ont
ario
,tw
odi
ffer
ent
part
ies
have
show
nin
tens
e
inte
rest
inth
elo
cal
cem
ent
pric
eph
enom
enon
.O
neis
an
indu
stry
vete
ran
and
his
par
tner
who
ispr
esid
ent
ofon
eof
the
coun
try’
sla
rges
tho
me
buil
ding
com
pani
es.
Rat
her
than
figh
tth
esy
stem
,th
etw
odec
ided
itm
ade
muc
h
bett
erfi
nanc
ial
sense
tofi
ndan
exte
rnal
sour
ceof
cem
ent
and
sell
itw
ithin
the
exis
ting
pric
est
ruct
ure.
Todo
this
,
they
set
upth
eir
own
cem
ent
com
pany
.
The
seco
nd
part
yis
per
hap
sev
enle
ssw
elco
me
toth
e
olig
opol
y’th
efe
dera
lB
urea
uof
Com
peti
tion
Polic
yIn
the
spri
ngof
1990
.it
obta
ined
ase
arch
war
rant
whi
chst
ates
that
aco
nsp
irac
yto
fixpr
ices
and
rigbi
dsin
the
cem
ent
and
read
y-m
ixco
ncr
ete
indu
stry
inth
eT
oron
toar
ea
exis
ted
from
May
.19
76to
July
,19
88F
eder
alof
fici
als
obta
ined
this
war
rant
tose
arch
the
offi
ces
ofth
efo
urm
ajor
play
ers
inth
eO
ntar
ioce
men
tin
dust
ry,
whi
chto
geth
er
dom
inat
eth
elo
cal
cem
ent
mar
ket.
lnth
ebo
omin
gco
nstr
ucti
onm
arke
t,w
ithhi
ghd
eman
d
for
read
y-m
ixco
ncr
ete
and
conc
rete
bric
ks,
anin
dep
end
ent
oper
ator
can
easi
lych
arg
em
ade-
in-O
ntar
iopr
ices
for
cem
ent
pow
der
Whe
nth
ings
slow
dow
n,ho
wev
er,
the
pric
eof
cem
ent
pow
der
rem
ains
high
,bu
tth
ebo
ttom
falls
out
ofth
ere
ady-
mix
concr
ete
mar
ket.
With
only
8pe
rcen
t
oFth
eT
oron
toco
ncr
ete
mar
ket,
inde
pend
ents
—w
hodo
not
have
thei
row
nsu
ppli
esof
cem
ent
pow
der
and
mus
t
pay
the
high
pric
e—ar
efo
rced
into
acl
assi
cpr
ice
squ
eeze
.T
heop
erat
ions
ofth
efo
urce
men
tm
anuf
actu
rers
incl
ude
read
y-m
ixco
ncr
ete
dist
ribu
tion
and
conc
rete
bloc
km
anuf
actu
ring
,su
bsid
iari
esth
atge
nera
lly
don’
t
carr
yth
epa
rent
com
pany
nam
e.T
hey,
ther
efor
e,co
ntro
l
thei
row
nsu
ppli
esof
cem
ent
pow
der
and
are
prot
ecte
d
agai
nst
afa
llin
the
mar
ket
for
conc
rete
.In
late
1990
,br
exam
ple,
pric
edi
scou
ntin
gon
read
y-m
ixco
ncre
tein
the
Tor
onto
area
ranged
from
$30
to$4
0a
cubi
cm
etre
,ab
out
25pe
rcen
tof
fth
e$1
24.5
0lis
tpr
ice.
Dis
coun
tson
cem
ent
pow
der,
onth
eot
her
hand
,ra
nged
less
than
10pe
rcen
t.
Smal
loper
ators
lack
ing
flex
ibly
-pri
ced
sou
rces
ofce
men
t
wer
ebe
ing
squee
zed
atbo
then
ds.
The
two
new
play
ers,
ther
efor
e,dec
ided
tose
cure
thei
r
own
supp
lyof
cem
ent
and
bypas
sth
ebi
gfi
rms.
The
y
look
edto
US
and
inte
rnat
iona
lso
urc
esan
dco
nst
ruct
ed
thei
row
nce
men
tte
rmin
alon
the
shor
esof
Lak
eO
ntar
io
near
Osh
awa.
From
the
begi
nnin
g,th
ene
wco
mpa
ny’s
stra
tegy
was
not
tow
age
hero
icba
ttle
agai
nst
the
mam
mot
hce
men
t
man
ufac
ture
rs.
Itca
lled
for
peac
eful
co-e
xist
ence
with
the
maj
orpl
ayer
sto
reap
adv
anta
ge
from
the
very
pric
ing
umbr
ella
prov
ided
byth
eol
igop
oly.
“Ido
n’t
wan
tto
do
enou
ghb
usi
nes
sto
mak
eth
eB
igFo
urw
ant
topu
shm
e
out.”
says
one
ofth
ein
dep
end
ent
com
pany
’sow
ners
.“I
do10
000
0to
nnes
ayea
rT
hey
do4.
5m
illio
nto
nnes
.
Wha
t’s
the
poin
tof
them
cutt
ing
the
pric
efo
ral
lth
eir
sale
s
just
toge
tm
y10
000
0to
nnes
out
ofth
em
arke
t2”
The
new
firm
,us
ing
itsin
tern
atio
nal
sou
rces
and
taki
ng
adv
anta
ge
ofgo
odsh
ippi
ngra
tes,
how
ever
,ca
nla
nd
cem
ent
inO
shaw
afo
rab
out
half
the
list
pric
ein
Tor
onto
Solo
ngas
the
fore
ign
sourc
esar
eab
leto
prov
ide
cem
ent
2i)4F
’l
E\T
1. sEO
FItFS(
)LIii
Es
UL
egislationto
Prev
ent
the
Red
uctio
no
fC
om
petitio
n
Lns’sin
tended
toprevent
theabuse
of
power
byinotiopolies
anduligopulies
were
first passedin
Canada
overa
centuryago. T
heold
laws
were
replacedin
1986by
theC
ompetition
Act.
The
purposeoF
theA
ctis
tonaintrnn
andencol irage
col ripetitionin
Canadian
industry.A
Com
petitionT
ribunalw
asestablished
under
tieA
ctto
reviewany
possibleviolations.
Activities
lorbidlen
by[lie
Act
include[lie
Following:
I.1grcenw
ntsto fix
pnces,output,
ordzstnln,tioii
ofgoods,
orto
it;u/rtlyrestrict
nitnjiii to
anhuh:stnj
Firms
may.
however,
exchangestatistics
andcredit
inflinnatiun,restrict
advertising,iLIH
Ico—
operatein
researchand
deselnpnientproviding
thatthese
actisi—tits
iii)N
Ut liz,iit
conipetifloii.
Mergers
thatw
ouldsubstantially
lessenconipefitiori
areprohibited.
Mergers
titaybe
horizontal,vertical,
orci)nglo
merate.
Ahorizontal
merg
eris
theunio
nof
two
orm
orefinns
inthe
same
industry.T
heunion
ofC
anadianA
irlinesInternational
Ltd.
andW
trdairin
1989is
anexaniple.
Inan
attempt
toestablish
itselfas
Canada’s
thirdm
ajorair
carrier,\T
hrdaircut
faressubstantially
inthe
1980sand
forcedits
competitors—
Air
Canada
andC
anadianAi rh
tiesI n
ternatio
nd
Ltd.—
toki
the
same.
\ard
air
failedin
itshid,
howeser,
andw
henit
lookedfor
abuyer,
onlyC
anadianA
irlinesIntenia—
tintIalL
td.w
otikiagree
topurchase
theIinii.
The
Coitip
etihon
Trib
un
al,tltereflire,
accepted
the
merg
er.
eventhough
itw
aslikel
toreduce
coitipetitiori.A
liinizoiit,diricrgr
ofthis
kindclearly
reducescom
petitionsince
only-tw
oair
carriersnow
havethe
triarketshareul
theoriginal
three.H
owever,
horizontalm
ergersm
ayresult
insig
nifican
teco
ililirnes
of
scale.A
verticalm
erger
isthe
unionof
a[Inn
with
its
..
mat
consistentlym
eetslo
calsta
nd
ard
s,th
ose
num
oers
arevery
persuasive.It m
aybe
toogood
tolast.
Foronething.
thenew
firmis
notthe
onlyone
torecognize
thepossibilities.
Asm
allerterm
inalhas
startedoperations
inO
wen
Sound,O
ntario,on
Georgian
Bay. Another
questionm
arkis
thereaction
ofthe
BigFcur.
Fornow
,they
seemto
regardthe
newcom
panyas
something
of acuriosity.
‘We
knowit’sthere,”
saysone
generalm
anagerol
am
ajorfirm
.“It’s
ahighly
integratedm
arket,sothere’s
onlyso
much
businessitcan
goafter
Ican’tsay
itis
regardedas
athreat,
thoughit
couldhave
am
inorim
pacton
prices.”
Tnough
itrem
ainsunspoken,
them
ajorplayers
might
secretlybe
relievedby
thearrival
ofnew
participants,
particularlyones
obviouslynot
inclinedto
up
setthe
juicy
pricingstructure,
After
all,the
federalB
ureauof
Com
peti
tionPolicy
may
bem
oresym
patheticto
anindustry
open
toall
comers
thanw
hatpreviously
amounted
toa
closed
shop.
SOU
OC
E:A
dapied1m
mD
unneryB
est,“A
crackin
thecem
ent
club7
Can
adian
Business,
March
1991.
Applications
1.W
hat
chara
cte
r;stics
detin
eth
ecem
ent
industry
in
Ontario
asan
oligopoly?
2. why
isthe
industrybeing
investigatedby
thefederal
Bureau
of Com
petitionPolicy?
3.H
owm
aysm
allin
dep
enden
tfirm
sin
them
arketbe
squ
eezedout?
4.H
owhas
thenew
firmd
iscussed
inthe
articleattem
pted
toget
aroundthe
dominance
ofthe
Big
Fourin
the
industry9
5.(a)
What
effectsd
oes
theprice
andm
arketstructure
in
theindustry
haveon
theco
nsu
mers
ofcem
ent?
(b)W
hatad
van
tages
do
esitafford
theB
igF
our?
6.D
oyou
believethe
Ontario
cement
industryshould
continueas
anoligopoly?
Why
orw
hynot?
Justifyyour
answer.
2 ..‘ih’ rgt’nand
theabuse
:f(IouIniavI
tpi
nitii,ii
Mer
ger
!M
erger
!V
.Im
peri
alO
ils
bid
tola
keov
erT
exac
o(C
anad
a)w
as
app
rov
edby
the
fede
ral
gover
nm
ents
Bur
eau
ofC
orn
pel
tion
Polic
yin
1989
—su
bjec
tto
cerl
ain
cond
itio
ns
Bef
ore
the
mer
ger,
the
two
com
pan
ies
wer
eth
ese
cond
and
four
lhla
rges
tfi
rms
sell
ino
gaso
line
inC
anad
aIm
peri
alO
ilha
dov
er30
00se
rvic
est
atio
ns,
5re
fine
ries
,32
dist
ribu
tion
term
inal
s,an
dse
vera
lpr
oduc
tpi
peli
nes.
Tex
aco
had
over
2000
serv
ice
stat
ions
,2
refi
neri
es,
21di
stri
buti
onte
rmin
als,
and
2pr
oduc
ipi
peli
nes
The
Bur
eau
of
Com
peti
tion
Polic
yap
pro
ved
the
deal
prov
ided
Impe
rial
Oil
sell
543
serv
ice
stat
ions
,on
eoi
lre
fine
ry,
and
14d
istr
i
buti
onte
rmin
als
Tab
le10
.2be
low
show
sth
esi
tuat
ion
in
the
indu
stry
befo
redi
vest
itur
e
Thu
s,w
ithth
eap
prov
alof
the
Bur
eau,
only
thre
em
ajor
oil c
orpo
rati
ons
cont
rol
over
two-
thir
dsof
the
coun
try’
sgas
stat
ions
and
refi
ning
capa
city
,ra
ther
than
four
Whi
leag
reei
ng
ihat
Impe
rial
Oil
sta
keov
erof
Tex
aco
rem
oves
a“r
igor
ous
and
effe
ctiv
eco
mpe
tito
rfr
omth
e
Can
adia
nga
soli
nean
dho
me-
heat
ing
mar
ket,
the
dire
ctor
ofth
eC
ompe
titi
ons
Bur
eau
asse
rted
thai
the
dive
stit
ure
agre
edto
byIm
peri
alw
ould
ensu
reth
atC
anad
ian
mo
tor
ists
wou
ldno
tla
cepr
ice
hike
sat
the
pum
psdu
eto
Tab
le10
.2T
he“b
igth
ree”
oil
corp
ora
tions
inC
anad
a
PE
RC
EiI
TA
I,F
QE
‘TO
TAL
ii,
THE
ID’J
Siq
,
CO
pP
Ufl
Ari
cil
G,5
5iA
iIC
,iJ
RE
Lli
liT
iGrA
rciT
i’
tmp
eria
t24
27
Pet
ro-C
anad
a24
22
She
ll18
15
reduced
com
peti
tion
The
dire
ctor
also
argued
that
con
cen
trati
on
inth
ere
fini
ngse
ctor
is“u
navo
idab
leif
Can
ada
isto
ob
tain
the
bene
fits
ofec
onom
ies
olsc
ale
inre
finin
g
Cri
tics
ofth
ede
alsa
idth
eyw
ould
figh
tit
whe
nit
went
befo
reth
eC
ompe
titi
onT
ribu
nal
for
fina
lao
prov
alW
hile
the
Com
peti
tion
Bur
eau
can
nego
tiat
ew
ithth
epa
rtie
sin
a
mer
ger
orta
keov
erto
ensu
reth
atco
mpe
titi
onis
not
dim
in
ishe
d,th
eC
ompe
titi
onT
ribu
nal
has
the
fina
lsa
yon
whe
ther
orno
tth
ede
alw
illgo
thro
ugh.
Cri
tics,
such
asth
e
Con
sum
ers
Ass
ocia
tion
ofC
anad
a,ar
gued
that
the
deaf
was
unnec
essa
ryan
ddan
ger
ous.
Itga
veIm
peri
alO
ilto
o
muc
hpo
wer
inA
tlant
icC
anad
a,Q
uebe
c,an
dO
ntar
io
mar
kets
and
wou
ldre
sult
inpr
ice
hike
sat
the
pum
p
The
thre
e-m
embe
rC
ompe
titi
onT
ribu
nal
inea
rly
1990
refu
sed
toap
prov
eth
ede
alun
less
Impe
rial
agre
edto
sell
abou
t10
0m
ore
gas
stat
ions
thro
ugho
utth
eco
untr
y—to
brin
gth
eto
tal
to63
8—an
dag
reed
togu
aran
tee
gaso
line
supp
lies
toin
dep
enden
tre
tail
ers,
espe
cial
lyin
cent
ral
Can
ada.
Inad
diti
on,
Impe
rial
Oil
had
tose
llal
lot
Tex
aco
Can
ada’
sas
sets
inA
tlant
icC
anad
a.
Impe
rial
acce
pte
dal
lof
the
prov
isio
nsfo
rpr
omot
ing
com
peti
tion
sugges
ted
byth
eC
ompe
titi
onT
ribu
nal
The
deal
was
give
nlin
alap
prov
alin
earl
y19
90
Ap
pli
cati
on
s
1.W
hat
isth
em
arke
tst
ruct
ure
ofth
ega
soli
nere
fini
ngan
d
mar
keti
ngin
dust
ryin
Can
ada9
Exp
lain
2.W
ithou
tdi
vest
itur
e,in
wha
tw
ays
mig
htth
em
erge
rbe
dis
adv
anta
geo
us
toC
anad
ian
cons
umer
san
din
dep
en
dent
gas
stat
ion
oper
ator
s9
3.H
owfa
r,in
your
opin
ion,
do
esth
edi
vest
itur
en
egat
e
thes
ed
isad
van
tag
es7
Exp
lain
your
posi
tion
Sup
plie
r.St
i’Iui
i.flu
eSe
cotu
Llla
rges
tst
eel
UO
Iuli
lt1\’
ifl
(iii
tdit
hulk
or’ t
.til
l(I
\\’i
iSecuiu
ipaii
ies
tli.it
srti
I\if
“‘it
Ili,
’l)(
latu
(lju
’uit
(uu’(
fIi(
’cou11nt’
atj(
uit
fllu
iss(
’(.’
tti’
,’sj
fs
iii
(‘Ss,’
iuiB
iIi’
IViiu
,iti’i
’i,ils
tiuiI
L’H
iiU’
Ii(’(’
ti\t’I
\’ui
li’V
fl1f
1’it
s()
jli’
i’Jt
iIH
is,
‘t’i’t
iintl
IiiL
’i’U
i’i’
Sits
uuul
I(li
iiuiu
tri’
rlii.’
1‘t
in’
ipiti
tiii
isi
ttii
ilie
iuit
k.
Aco
ng
lou
nen
ite
rnet
’ger
oet’
itrs
‘lu
en
finns
in
iuui
ri’L
tjc’
ilin
iliu
stru
s(.
‘Uti
ihil
’R’.
,‘
t’on
Lhi
inei
’,zt
c’en
tihl
jiuclu
udi’
fil-il
isIu
’uni
usuid
el’’
ilif
len’
uut
mil
i,st
nes
a’
uii
iuii
uig
.m
%uu
i’,i
uiel
’.uiu
ilu’
etad
iuui
i,C
nuitz
li,,ii
t’i’
afi
tin
-gil
’sa
less
IdoI
iii
i’isl
iiee
cnii
i1w
titi
iiui
stili
sttu
i—
hill’
flu
ai’i
’i’i
tlii’i
’‘‘t’
rtie,
ilii
i’li
riuit
iiiu
tal
uii(’
u’gi
’I’S
.
206_
It.I
E,l
ISE
(IKBES(.)L
lu:ES
.3.Illegal
practicesA
ciiiiiihercit
tradepr;L
chces
winch
Iinit
oiiiip
etition
arealso
illegalcinder
theA
ct.U
ieseillegal practices
iicludethe
lollowuig.
ti)R
etailsale
pricem
aintenance.It
isillegal
For
manufacturers
topressu
reretailers
intoselling
apro
d
uctat
aprice
theyfix,
orfor
retailersto
agreeto
sellthe
goodat
thatfixed
price.
(ii)Predatory
pricing.A
finnm
ustnot
sella
goodat
aprice
farless
thanthe
costof
productionin
orderto
forceother
firTus
out
of business.
(iii)Price
discrimination.
Aseller
may
notsell goods
atdifferent
pricesto
individualsw
hoare
buyingsinular
quantityand
qnalitv.Price
reductionson
bulkp
ur
chasesor
Forspecial
even
tssuch
asclearance
sales,
however,
arelegal.
CR
egu
lation
sto
Contro
lor
Set
Prices
forN
atural
Monopolies
As
we
haveseen
,in
som
ein
dustries
thereturns
toscale
aresuch
thatonly
on
efirm
canoperate
elliciently.T
hese
natu
ralm
onopoliesare
comm
onin
suchin
dus
triesas
electricityand
naturalgas
distribution,tele
phoneservices,
andrail
andbus
transportation.IF
severalfirm
sw
ereto
compete
inm
y’one
ofth
ese
industries,it
islikely’
thatcosts
would
risean
dth
e
qualityof service
would
decline.how
ever,m
onopoliestend
toset
pricesabove
mar
ginalcost.
TIusis
especiallytnie
when
thereare
Fewclose
substitutesfor
thefinn’s
productor
service.G
overnments,
therefore,control
naturalm
onopoliesthrough
regulatoryagencies.
There
arethree
major
regulatoryagencies
atthe
Federallevel.
Tbe
National
Ener
Board
isresponsi
bleFor
oiland
gaspipelines
andregulates
theexport
andim
portof oil
andelectricity
The
Canadian
Badio
Television
andTelecoiniricicrications
Com
mission
regulates
broadcasting,television,
cabletelevision,
andtelephone
rates.T
heC
anadianT
ransportC
oinInissnnk
regulatesrailw
ay,air,
andw
atertransportation.
The
mi ‘st
i inpnflantrole
of
theseagencies
isto
regulateprices.
Bytradition,
tIreregulated
pricehas
beena
lairone—that
is,it has
beenset to
coveraverage
totalcosts.
Thus,IIrc)ilo
po
kan
doligopok
1jrolitsriid
pricesare
setat
alow
erlevel
thanw
nildbe
thecase
if’tIre
industn
were
unregulated.
CP
ublicO
wnership
ofN
aturalM
onopolies
Govern
men
tsm
ayalso
controlnatural
monopolies
throughow
iwrship
of theindustry.
Many
ofthe
pro
vin
cialand
municipally—
owned
corporationsin
Canada
arenatural
monopolies.
Most provinces,
forexam
ple,ow
ntheir
electricalgeneration
andtransm
issionsystem
sand,
inthe
Prairie
provinces,th
etelephone
system.
Inthese
industries,governm
entow
nershipis
asubstitute
forregulation.
Com
missions
controllingthe
publicly-owned
finnshave
direct knowledge
of
costsan
dcan
thusset
outputat
break-evenlevels,
orw
henconsidered
app
rop
riate(e.g.,
inth
ecase
of
urb
antran
sit),to
takea
loss.
..
Summ
ary
a.Four
major
characteristicsof
monopolislically
compelihve
markets
arem
anyfirm
s,productdifferentiation, ease
of entry, andnon-price
competition.
b.Them
onopolisticaltycom
petitivefirm
facesa
downw
ard-slopingdem
andcurve, so
thattoincrease
sales,itm
ustdecrease
price.T
heeffect
ofchanges
inprice
ontotal
salesdepends
onthe
number
ofcompetitors
andthe
degreeof
productdifferentiation.
Thelarger
thenum
berof
firms
andthe
weaker
theproduct
differentiation,the
greaterthe
effectof
pricechanges
onsates.
c.In
theshort
run,the
monopotistically
competitive
firmwill m
aximize
itsprofits
atthe
pointw
herem
arginalcost
equalsm
arginalrevenue.
In(he
longrun,
thetendency
isfor
economic
profitsto
beelim
inatedbecau
seabove
normal profits
willattract other
firms
intothe
industry. Thefirm
willtend
tom
akeonly
anorm
al profit orbreak
evenin
thelong
run.
