by: adrian morales and angelica morgan. characterized by (1) relatively large number of sellers;...
TRANSCRIPT
By: Adrian Morales and Angelica Morgan
Characterized by • (1) Relatively large number of sellers; competitive aspect• (2) Differentiated products; monopolistic aspect• (3) Easy entry/exit to industry; competitive aspect
In general, monopolistically competitive industries are more competitive than they are monopolistic
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
Fairly large number of firms but less then pure competition. Therefore,
1. Small market shares
2. No collusion
3. Independent action
• Product differentiation- Monopolistic competitive firms turn out variations of a particular product. Product differentiation may occur through:
• Product Attributes• Service
• Location• Brand Names and Packaging
• Easy entry and exit is easy.
• Financial barriers such as copyrights trademarks makes it difficult/costly to imitate their products.
• Nothing keeps monopolistic competitor from shutting down.
• Advertising- goal of product differentiation and advertising is non-price competition
• Monopolistic Competitive Industries- Retail establishments: grocery stores, gas stations, barbershops, clothing stores, and restaurants. Professional services: medical care, legal assistance, and real estate sales.
• Assumptions: each firm in an industry is producing a specific differentiated product and engaging in a particular amount of advertising.
• The Firms Demand Curve- monopolistic competitor’s demand is more elastic than demand faced by a pure monopolists
• Not perfectly elastic for two reasons:
1) Monopolistic competitor has fewer rivals,
2) Product differentiation
D
MR
P1
Pri
ce a
nd
Cos
ts
Q1
Short-RunEconomic
Profits
Quantity
A1
MC
ATC
D
MR
MC
P2
ATC
Pri
ce a
nd
Cos
ts
Q2
Short-RunEconomic
Losses
Quantity
A2
D
MR
MC
P3 = A3
Pri
ce a
nd
Cos
ts
Q3
Quantity
NormalProfitOnly
ATC
• Some firms may have sufficient product differentiation such that firms cannot duplicate them even in the long run. Example: Well known brand names.
• Product differentiation can lead to financial barriers making entry more difficult than if the product where standardized. This suggests some monopoly power with small economic profits continuing even in the long run.
D
MR
MC
P3 = A3
Pri
ce a
nd
Cos
ts
Q3
Long-Run EquilibriumPrice is ≠ Minimum
ATC
Price MC
ATC
D
MR
MC
P3 = A3
Pri
ce a
nd
Cos
ts
Q3
ATC
Q4
Excess Capacity
(1) In the eyes of monopolistic competitors:• A firm can attempt to stay ahead of competitors and keep profits
through further product differentiation and better advertising.• Rivals must imitate/improve on the product or lose business• If demand ↑ by more than enough cover advertising costs, then the firm
has improved financial position.(2) In the eyes of consumers:• Consumers are offered a wide range of types, styles brands and quality
gradations of a product. • Product differentiation creates a tradeoff between consumer choice and
product efficiency. • Stronger product differentiation = greater excess capacity (product
inefficiency) = greater satisfaction of diverse consumer tastes.
• Assumptions: a constant given product and given level of advertising expenditures.
• However, monopolistic competitors must determine what variety of a product, at what price, and what level of advertising will result in the greatest profit.
• Moreover, this optimal combo can only be found through trial and error.
Characterized by:• A market demanded by a few large producers• Selling either a homogenous or differentiated product• Considerable control over prices• Strategic behavior or self interested behavior that takes into
account the reactions of other firms• Mutual interdependence or a situation where a firm’s profit
depends on not only their own price and sales strategies but also that of other firms.
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
Entry Barriers:
• New firms tend to be high-cost producers
• Large expenditures for capital
• Ownership of raw materials
• Patents, copyrights, and trademarks
• Retaliatory pricing and advertising strategies
Mergers:
• Increase market share
• Greater economies of scale, greater control over market supply and thus the price of it product.
Concentration Ratio
• Percentage total output produced and sold by an industry’s largest firms
• Example: Four largest U.S. producers of breakfast cereal account for 83% of cereals made in the U.S.
• If the four largest firms control 40% of the market than the industry is considered oligopolistic.
Shortcomings:
1. Localized Markets
2. Interindustry Competition
3. World Trade
Herfindahl Index
• The sum of the squared percentage market shares of all the firms in industry.
• Formula: (%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2
• Problem: Suppose you have industry X and Y. X is pure monopoly with a 100% concentration ratio. Y is an oligopoly with 100% as well but each firm has a 25% market share.
• Which has a a greater market share?
• Herfindahl Index is the solution:
Industry X → 1002 = 100,000
Industry Y → 252+252+252+252 = 25,000
• The Game Theory is the study of how people behave in strategic situations
• Game Theory model assumptions: (1) Duopoly; (2) Price high or Price low
High Low
Nike’s Price Strategy
High
Low
Ree
bo
k’s
Pri
ce S
trat
egy
GreatestCombined
Profit
High Low
Nike’s Price Strategy
High
Low
Ree
bo
k’s
Pri
ce S
trat
egy Independent
Actions increases the profits at the expense of the
other
IndependentActions increases the profits at the expense of the
other
High Low
Nike’s Price Strategy
High
Low
Ree
bo
k’s
Pri
ce S
trat
egy
Collusion increases the profits of both
firms
High Low
Nike’s Price Strategy
High
Low
Ree
bo
k’s
Pri
ce S
trat
egy
The incentive to cheat
becomes very tempting
Three distinct models for oligopolistic pricing and output behavior:
1. The Kinked Demand Curve
2. Collusive Pricing
3. Price Leadership
Why not a single model, as in our discussions of the other market structures?
• Diversity of oligopolies
• Complications of Interdependence
The diversity of oligopolies and the presence of mutual interdependence are reflected in the models that follow…
D1
MR1Quantity
The Anheuser’s demand andmarginal revenue curveswhen rivals match price
changes
Pri
ce
Q0
P0
MR2D1
D2
MR1Quantity
The Anheuser’s demand andmarginal revenue curveswhen rivals ignore price
changes
Pri
ce
Q0
P0
MR2D1
D2
MR1Quantity
Pri
ceRivals
Follow any price cuts
Q0
P0
MR2D1
D2
MR1Quantity
Pri
ce
Rivals ignoreprice any increase
Q0
P0
MR2D1
D2
MR1Quantity
Pri
ce
Behold!The Kinked Demand Curve
Q0
P0
D
Pri
ce
Anheuser Busch’s Demand Curve
Q0
P0
D
MR1Quantity
Pri
ce
MC2
MC1
MR2
Prices are generally stable in noncollusive oligopolies for
both demand and cost reasons
Q0
P0
D
Quantity
Profit maximizationat the kink
Pri
ce
MC2
MC1
MR2
MR1
Q0
P0
D
Quantity
This behavior can setoff a price war.P
rice
MC2
MC1
MR2
MR1
Q0
P0
Colluding Oligopolists Will
Split the Monopoly
Profits.
D
MC
ATC
MR
EconomicProfit
MR = MC
Pri
ce a
nd
cos
ts
Q0
P0
A0
Price ≠ Minimum ATC
Price ≠MC
• Demand and Cost Differences• Number of Firms
• Cheating• Recession
• Potential Entry• Legal Obstacles
• An understanding by which oligopolists can coordinate prices without outright collusion
• Most efficient firm initiates price changes and all the other firms follow the leader
Leadership tactics include:
• Infrequent Price Changes
• Communications
• Limit Pricing
• Increased foreign competition
• Limit Pricing
• Advances in Technology
