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This chapter explores the concept of imperfect competition, specifically monopolistic competition and oligopoly. It discusses the characteristics and behavior of firms in these market structures, including differentiated products, nonprice competition, and strategic interdependence. The chapter also examines the concept of excess capacity and the limits of oligopoly.
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Economics: Principles and Applications, 2eby Robert E. Hall & Marc Lieberman
The Concept of Imperfect Competition Imperfect competition refers to market structures between perfect competition and monopoly. In imperfectly competitive markets, there is more than one seller, but too few to create a perfectly competitive market. In addition, imperfectly competitive markets often violate other conditions of perfect competition, such as the requirement of a standardized product or free entry and exit.
Monopolistic Competition • Monopolistic Competition in the Short Run • Monopolistic Competition in the Long Run • Excess Capacity Under Monopolistic Competition • Nonprice Competition
Monopolistic Competition A monopolistically competitive market has three fundamental characteristics: 1. Many buyers and sellers
Monopolistic Competition A monopolistically competitive market has three fundamental characteristics: 2. No significant barriers to entry or exit
Monopolistic Competition A monopolistically competitive market has three fundamental characteristics: 3. Differentiated products
Monopolistic Competition Because it produces a differentiated product, a monopolistic competitor faces a downward-sloping demand curve: when it raises its price a modest amount, quantity demanded will decline (but not all the way to zero.)
Monopolistic Competition Under monopolistic competition, firms can earn positive or negative economic profit in the short run. But in the long run, free entry and exit will ensure that each firm earns zero economic profit, just as under perfect competition.
Monopolistic Competition In long run, a monopolistic competitor will operate with excess capacity--that is, it will produce too little output to achieve minimum cost per unit.
Monopolistic Competition Nonprice Competition Any action a firm takes to increase the demand for its product, other than cutting its price.
Oligopoly • Oligopoly in the Real World • Why Oligopolies Exist • Oligopoly Behavior • Cooperative Behavior in Oligopoly • The Limits of Oligopoly
Oligopoly Oligopoly A market structure in which a small number of firms are strategically interdependent.
Oligopoly Minimum Efficient Scale (MES) The level of output at which economies of scale are exhausted and minimum LRATC is achieved.
Oligopoly Game Theory An approach to modeling the strategic interaction of oligopolists in terms of moves and countermoves.
Oligopoly Payoff Matrix A table showing the payoffs to each of two players for each pair of strategies they choose.
Oligopoly Dominant Strategy A strategy that is best for a firm no matter what strategy its competitor chooses.
Oligopoly Duopoly An oligopoly market with only two sellers.
Oligopoly Repeated Play A situation in which strategically interdependent sellers compete over many time periods.
Oligopoly Explicit Collusion Cooperation involving direct communication between competing firms about setting prices.
Oligopoly Cartel A group of firms that selects a common price that maximizes total industry profits.
Oligopoly Tacit Collusion Any form of oligopolistic cooperation that does not involve an explicit agreement.
Oligopoly Tit for Tat A game-theoretic strategy of doing to another player this period what he has done to you in the previous period.
