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

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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


9 monopolistic competition oligopoly

  • 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


9 monopolistic competition oligopoly

P, cost

MC

$70

D

MR

Q (jeans/day)

150


9 monopolistic competition oligopoly

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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