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micro economics chapter 13

13
Monopolistic Competition
and Oligopoly

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.






LO1

Monopolistic Competition
Relatively large number of sellers
• Small market shares
• No collusion
• Independent action
• Some control over price

Differentiated products
• Product attributes
• Service, location
• Brand-names, packaging


Monopolistic Competition

• Easy entry and exit
• Advertising
• Nonprice competition

LO1


Price and Output in Monopolistic
Comp

• Demand is more elastic than pure


LO2

monopoly because there are more
rivals and substitutes
Demand is less elastic than pure
competition because there are fewer
rivals and imperfect substitutes


Monopolistic Competition:
Efficiency

• Inefficient
• Productive inefficiency
• P > ATC
• Allocative inefficiency
• P > MC

LO2




Oligopoly

• A few large producers
• Homogeneous or differentiated



LO3

products
Limited control over price
• Mutual interdependence
• Strategic behavior
Entry barriers
Mergers


Oligopolistic Industries

• Four-firm concentration ratio
• 40% or more to be oligopoly
• Shortcomings
• Localized markets
• Inter-industry competition
• World price
• Dominant firms – Herfindahl Index
LO3


High Concentration Industries
(1)
Industry
Primary copper

(2)
4-Firm
Concentration
Ratio

(3)
Herfindahl
Index

99

ND

(1)
Industry

(2)
4-Firm
Concentration
Ratio

(3)
Herfindahl
Index

Petrochemicals

85

2662

83

1901

Cane sugar refining

99

ND

Small arms
ammunition

Cigarettes

95

ND

Motor vehicles

81

2321

80

2515

Household laundry
equipment

93

ND

Men’s slacks and
jeans

Beer

91

ND

Aircraft

81

ND

Electric light bulbs

89

2582

Breakfast cereals

78

2521

78

2096

Glass containers

88

2582

Household vacuum
cleaners

Turbines and
generators

88

ND

Phosphate fertilizers

78

1853

Tires

77

1807

Electronic
computers

76

Alcohol distilleries

71

Household
refrigerators and
freezers

85

1986

Primary aluminum

85

ND

LO1

2662
1609


3 Oligopoly Models

• Kinked Demand Curve
• Collusive Pricing
• Price Leadership
• Reasons for 3 models
• Diversity of oligopolies
• Complications of interdependence

LO5


Kinked Demand Curve

• Criticisms
• Explains inflexibility, not price
• Prices are not that rigid
• Price wars

LO6


Overt Collusion

• Collusion reduces uncertainty,



LO6

improves control of price, profits rise,
and prevents entry of firms
Cartels - a group of firms or nations
that collude
• Formally written agreement
• Sets output levels and price for
members
OPEC


Covert Collusion

• Gentleman’s agreements
• Informal understandings often in
social settings between firms about
price and output

LO6


Obstacles to Collusion

• Demand and cost differences
• Number of firms
• Cheating
• Recession
• New entrants
• Legal obstacles
• Golden Balls
LO6


Global Perspective

LO6


Price Leadership Model

• Price Leadership
• Dominant firm initiates price



LO6

changes
• Communicates price change
• Other firms follow the leader
Use limit pricing to block entry of new
firms
Possible price war


Oligopoly and Efficiency

• Oligopolies are inefficient
• Productively inefficient P > minATC
• Allocatively inefficient P > MC
• Qualifications
• Increased foreign competition
• Limit pricing
• Technological advance
LO7



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