9 monopolistic competition oligopoly
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9. Monopolistic Competition & Oligopoly

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9. Monopolistic Competition & Oligopoly. Monopolistic Competition Oligopoly. Measuring market dominance. 4-firm conentration ratio % sales from 4 largest firms > 40% then oligopoly < 40% then monopolistic comp. Herfindahl-Hirschman Index (HHI). largest 50 firms

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9 monopolistic competition oligopoly
9. Monopolistic Competition & Oligopoly
  • Monopolistic Competition
  • Oligopoly
measuring market dominance
Measuring market dominance
  • 4-firm conentration ratio
    • % sales from 4 largest firms
    • > 40% then oligopoly
    • < 40% then monopolistic comp.
herfindahl hirschman index hhi
Herfindahl-Hirschman Index (HHI)
  • largest 50 firms
  • sum square of % market share
  • used by Justice Department
  • if monopoly

= (100)2 = 10,000

hhi cont
HHI (cont.)
  • if < 1000
    • market is competitive
  • if > 1800
    • market is uncompetitive
oligopoly
Oligopoly
  • small number of firms
  • interdependent behavior
  • barriers to entry
examples
examples
  • Airlines
  • Automobiles
  • Cereal
  • Soft Drinks
what types of barriers
what types of barriers?
  • economies of scale
    • auto industry
  • legal restrictions
  • brand recognition
    • cereal, soft drinks
  • control over essential resource
firm behavior
Firm behavior
  • no one model of behavior
  • set of possible behaviors
cartel
Cartel
  • firms collude to act like a single monopolist
    • restrict output, charge higher price
    • block entry
price leadership
Price leadership
  • informal collusion
  • dominant firm sets price
    • other firms follow to avoid a price war
    • steel, airline, auto industries
slide12
cartels are tough to maintain
    • each firm has output quota
    • each firm tempted to cheat
    • tough to block new entry
collusion and cartels
Collusion and Cartels
  • firms may collude
    • divide market
    • fix prices
    • illegal in U.S.
  • examples
    • OPEC
    • ADM & others
monopolistic competition
Monopolistic Competition
  • large # of firms
  • product differentiation
  • compete w/ quality, price, marketing
  • no one firm dominates
  • no collusion among firms
  • free to enter/exit
examples1
examples
  • running shoes
  • fast food franchises
  • clothing
  • cleaning supplies
  • beauty products
product differentiation
product differentiation
  • physical differences
    • color, size, taste ...
  • location
    • convenience, drug stores
  • services
    • delivery
  • image
    • high quality vs. value
firm behavior short run
Firm Behavior, short run
  • Tommy Hilfiger Jeans
  • demand curve downward sloping
    • less elastic than perfect competition
    • more elastic than a monopolist
  • choose price & output
    • like a monopolist
slide18

P, cost

MC

$70

D

MR

Q (jeans/day)

150

slide19

economic profit

P, cost

MC

$70

ATC

D

MR

Q (jeans/day)

150

($70-$20)(150)

= $7500

$20

long run
Long Run
  • zero economic profit
  • why?
    • economic profit leads to entry
    • economic loss leads to exit
    • no entry/exit with zero economic profit
excess capacity
Excess capacity
  • firms output is not at minimum of ATC
    • output too small
    • loss of economic welfare
advertising marketing
Advertising & marketing
  • firms in monopolistic competition spend more on this than perfect competition
    • cost curves are higher
    • is this a waste? Or
    • do consumer benefit from greater selection?
summary
Summary
  • between perfect competition & monopoly
  • monopolistic comp. chooses P & Q like a monopolistic
  • oligopolist behavior interdependent
  • importance of product differentiation
  • importance of strategic behavior
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