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1、,Lecture 12,Monopolistic Competition and Oligopoly,Lecture 12,Slide 2,Topics to be Discussed,Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners Dilemma,Lecture 12,Slide 3,Topics to be Discussed,Implications of the Prisoners Dilemma for Oligopolistic Pric
2、ing Cartels,Lecture 12,Slide 4,Monopolistic Competition,Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product,Lecture 12,Slide 5,Monopolistic Competition,The amount of monopoly power depends on the degree of differentiation. Examples of this very common market structure incl
3、ude: Toothpaste Soap Cold remedies,Lecture 12,Slide 6,Monopolistic Competition,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 The greater the preference (differentiation) the hi
4、gher the price.,Lecture 12,Slide 7,Monopolistic Competition,Question Does Procter & Gamble have much monopoly power in the market for Crest?,Lecture 12,Slide 8,Monopolistic Competition,The Makings of Monopolistic Competition Two important characteristics Differentiated but highly substitutable produ
5、cts Free entry and exit,A Monopolistically Competitive Firm in the Short and Long Run,Quantity,$/Q,Quantity,$/Q,Short Run,Long Run,Lecture 12,Slide 10,Observations (short-run) Downward sloping demand-differentiated product Demand is relatively elastic-good substitutes MR P Profits are maximized when
6、 MR = MC This firm is making economic profits,A Monopolistically Competitive Firm in the Short and Long Run,Lecture 12,Slide 11,Observations (long-run) Profits will attract new firms to the industry (no barriers to entry) The old firms demand will decrease to DLR Firms output and price will fall Ind
7、ustry output will rise No economic profit (P = AC) P MC - some monopoly power,A Monopolistically Competitive Firm in the Short and Long Run,Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium,$/Q,Quantity,$/Q,Quantity,Perfect Competition,Monopolistic Competit
8、ion,Lecture 12,Slide 13,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.,Lecture 12,Sl
9、ide 14,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.,Lecture 12,Slide 15,Monopolistic Competition,Questions 1) If the market became competitive, what would
10、happen to output and price? 2) Should monopolistic competition be regulated?,Lecture 12,Slide 16,Monopolistic Competition,Questions 3) What is the degree of monopoly power? 4) What is the benefit of product diversity?,Lecture 12,Slide 17,Monopolistic Competition in the Market for Colas and Coffee,Th
11、e markets for soft drinks and coffee illustrate the characteristics of monopolistic competition.,Lecture 12,Slide 18,Elasticities of Demand for Brands of Colas and Coffee,Colas: Royal Crown -2.4 Coke -5.2 to -5.7 Ground Coffee: Hills Brothers -7.1 Maxwell House -8.9 Chase and Sanborn -5.6,Brand Elas
12、ticity of Demand,Lecture 12,Slide 19,Questions 1) Why is the demand for Royal Crown more price inelastic than for Coke? 2) Is there much monopoly power in these two markets? 3) Define the relationship between elasticity and monopoly power.,Elasticities of Demand for Brands of Colas and Coffee,Lectur
13、e 12,Slide 20,Example,At its current output level of 10, a monopolistically competitive firm has MR=4, MC=4, ATC=6, and P=8. Is this market in long-run equilibrium? If not, describe the adjustment process necessary to achieve long-run equilibrium?,Lecture 12,Slide 21,Oligopoly,Characteristics Small
14、number of firms Product differentiation may or may not exist Barriers to entry,Lecture 12,Slide 22,Oligopoly,Examples Automobiles Steel Aluminum Petrochemicals Electrical equipment Computers,Lecture 12,Slide 23,Oligopoly,The barriers to entry are: Natural Scale economies Patents Technology Name reco
15、gnition,Lecture 12,Slide 24,Oligopoly,The barriers to entry are: Strategic action Flooding the market Controlling an essential input,Lecture 12,Slide 25,Oligopoly,Management Challenges Strategic actions Rival behavior Question What are the possible rival responses to a 10% price cut by Ford?,Lecture
16、 12,Slide 26,Oligopoly,Equilibrium in an Oligopolistic Market In perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rivals response when choosing output and price. In oligopoly the producers must consider the response of competitors when choosing output and price.,Lecture 12,Slide 27,Oligopoly,Equilibrium in an Oligopolistic Market Defining Equilibrium Fir
