chapter_12Monopolistic Competition and Oligopoly

Chapter 1
Slide 8
A Monopolistically Competitive Firm in the Short and Long Run
$/Q
Short Run MC
$/Q
Long Run MC
AC
AC
PSR
PLR DSR
DLR
QSR
MRSR
Quantity
MRLR
QLR
Quantity
The greater the preference (differentiation) the higher the price.
Chapter 1
Slide 6
Monopolistic Competition
Question
Does Procter & Gamble have much monopoly power in the market for Crest?
2) Is there much monopoly power in these two markets?
3) Define the relationship between elasticity and monopoly power.
Chapter 1
Slide 19
Oligopoly
Characteristics
Chapter 1
Slide 13
Monopolistic Competition
Monopolistic Competition and Economic Efficiency
With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists.
Chapter 1
Slide 26
Oligopoly
Nash Equilibrium
Each firm is doing the best it can given what its competitors are doing.
Chapter 1
Slide 27
Oligopoly
The Cournot Model
Chapter 1
Slide 21
Oligopoly
The barriers to entry are:
Natural Scale economies Patents Technology Name recognition
Chapter 1
Slide 22
Oligopoly
The barriers to entry are:
Chapter 1
Slide 15
Monopolistic Competition
Questions 3) What is the degree of monopoly power? 4) What is the benefit of product diversity?
Chapter 1
Slide 16
Prisoners’ Dilemma
Chapter 1
Slide 2
Topics to be Discussed
Implications of the Prisoners’ Dilemma for Oligopolistic Pricing
Cartels
Chapter 1
Slide 3
Monopolistic Competition
MR < P Profits are maximized when MR = MC This firm is making economic profits
Chapter 1
Slide 10
A Monopolistically Competitive Firm in the Short and Long Run
Chapter 1
Slide 11
Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium
Perfect Competition
Monopolistic Competition
Strategic action Flooding the market Controlling an essential input
Chapter 1
Slide 23
Oligopoly
Management Challenges
Strategic actions Rival behavior
Duopoly Two firms competing with each other Homogenous good The output of the other firm is assumed to be fixed
Chapter 1
Slide 28
Firm 1’s Output Decision
Toothpaste
Crest and monopoly power
Procter & Gamble is the sole producer of Crest
Consumers can have a preference for Crest---taste, reputation, decay preventing efficacy
Chapter 12
Monopolistic Competition and
Oligopoly
Topics to be Discussed
Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The
Chapter 1
Slide 17
Elasticities of Demand for Brands of Colas and Coffee
Brand
Elasticity of Demand
Colas: Ground Coffee:
Royal Crown Coke Hills Brothers Maxwell House Chase and Sanborn
Observations (long-run)
Profits will attract new firms to the industry (no barriers to entry)
The old firm’s demand will decrease to DLR Firm’s output and price will fall Industry output will rise No economic profit (P = AC) P > MC -- some monopoly power
Small number of firms Product differentiation may or may not exist Barriers to entry
Chapter 1
Slide 20
Oligopoly
Examples
Automobiles Steel Aluminum Petrochemicals Electrical equipment Computers
$/Q
$/Q
MC AC
Deadweight loss
MC AC
P
PC
D = MR
Hale Waihona Puke MRLRDLRQC
Quantity
QMC
Quantity
Monopolistic Competition
Monopolistic Competition and Economic Efficiency
The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle.
Question
What are the possible rival responses to a 10% price cut by Ford?
Chapter 1
Slide 24
Oligopoly
Equilibrium in an Oligopolistic Market
In perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rival’s response when choosing output and price.
Monopolistic Competition in the Market for Colas and Coffee
The markets for soft drinks and coffee illustrate the characteristics of monopolistic competition.
Chapter 1
Slide 7
Monopolistic Competition
The Makings of Monopolistic Competition
Two important characteristics Differentiated but highly substitutable products Free entry and exit
-2.4 -5.2 to -5.7 -7.1 -8.9 -5.6
Chapter 1
Slide 18
Elasticities of Demand for Brands of Colas and Coffee
Questions
1) Why is the demand for Royal Crown more price inelastic than for Coke?
Chapter 1
Slide 14
Monopolistic Competition
Questions
1) If the market became competitive, what would happen to output and price?
2) Should monopolistic competition be regulated?
Defining Equilibrium Firms doing the best they can and have no incentive to change their output or price All firms assume competitors are taking rival decisions into account.
P1
D1(75) MR1(75) Chapter 1
D1(0)
If Firm 1 thinks Firm 2 will produce nothing, its demand
curve, D1(0), is the market demand curve.
If Firm 1 thinks Firm 2 will produce 50 units, its demand curve is
In oligopoly the producers must consider the response of competitors when choosing output and price.
Chapter 1
Slide 25
Oligopoly
Equilibrium in an Oligopolistic Market
A Monopolistically Competitive Firm in the Short and Long Run
Observations (short-run)
Downward sloping demand--differentiated product
Demand is relatively elastic--good substitutes