Chapter 9: Monopolistic Competition and Oligopoly
In monopolistic competition, firms can differentiate their products by the product attributes, by service, with location, or with brand names and packaging. There is relatively easy entry and exit, just not as easy as with perfect competition. That is why the number of sellers is not as large as in perfect competition, but it is relatively large. This type of market experiences some pricing power due to the differentiated product. If a firm goes to the trouble and expense of differentiating their product, they should let people know about it. They can do this through advertising.
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Monopolistic Competition and OligopolyChapter 9McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reservedMonopolistic CompetitionRelatively large number of sellersDifferentiated productsEasy entry and exitAdvertising9-* Price and Output in Monopolistic Competition Demand is highly elasticShort-run profit or lossProduce where MR = MCLong-run normal profitEntry and exitInefficientProduct varietyLO29-*The Short Run: Profit or LossLO2QuantityPrice and CostsMR = MCMCMRD1ATCEconomicProfitQ1A1P109-*The Short Run: Profit or LossLO2QuantityPrice and CostsMCMRD2ATCLossQ2A2P20MR = MC9-*The Long Run: Only a Normal ProfitLO2QuantityPrice and CostsMCMRD3ATCQ3P3= A30MR = MC9-*Monopolistic Competition: EfficiencyInefficientProductive inefficiencyP > ATCAllocative inefficiencyP > MCLO29-*Monopolistic Competition: EfficiencyP = MC = min ATC for pure competition (recall)LO2P4Q4Price is lowerExcess capacity atminimum ATCMonopolistic competition is not efficient9-*Product VarietyThe firm constantly manages price, product, and advertisingBetter product differentiationBetter advertisingThe consumer benefits by greater array of choices and better productsTypes and stylesBrands and qualityLO29-*OligopolyA few large producersHomogeneous or differentiated productsLimited control over priceMutual interdependenceStrategic behaviorEntry barriersMergersLO39-*Game Theory OverviewOligopolies display strategic pricing behaviorMutual interdependenceCollusionIncentive to cheatPrisoner’s dilemmaLO49-*Game Theory OverviewLO4RareAir’s Price StrategyUptown’s Price StrategyABCD$12$12$15$6$8$8$6$15HighHighLowLow2 competitors2 price strategiesEach strategy has a payoff matrixGreatest combined profitIndependent actions stimulate a response9-*Game Theory OverviewLO4RareAir’s Price StrategyUptown’s Price StrategyABCD$12$12$15$6$8$8$6$15HighHighLowLowIndependently lowered prices in expectation of greater profit leads to worst combined outcomeEventually low outcomes make firms return to higher prices9-*Kinked-Demand TheoryNoncollusive oligopolyUncertainty about rivals’ reactionsRivals match any price changeRivals ignore any price changeAssume combined strategyMatch price reductionsIgnore price increasesLO59-*Kinked-Demand CurveLO5MR2D2D1MR1Q0MC1MC2P0efg9-*Kinked-Demand CurveCriticismsExplains inflexibility, not pricePrices are not that rigidPrice warsLO69-*Price Leadership ModelPrice leadershipDominant firm initiates price changesOther firms follow the leaderUse limit pricing to block entry of new firmsPossible price warLO69-*CollusionCartelOvert collusionCovert collusionJoint-profit maximizationLO69-*CollusionLO6DMR=MCATCMCMRP0A0Q0Economicprofit9-*Overt CollusionCartels: a group of firms or nations that colludeFormally agree to the price Set output levels for membersCollusion is illegal in the United StatesOPECLO69-*Obstacles to CollusionDemand and cost differencesNumber of firms CheatingRecessionNew entrantsLegal obstaclesLO69-*Oligopoly and AdvertisingPrevalent to compete with product development and advertisingLess easily duplicated than a price changeFinancially able to advertise LO79-*Positive Effects of AdvertisingLow-cost way of providing information to consumersEnhances competitionSpeeds up technological progressCan help firms obtain economies of scaleLO79-*Oligopoly and AdvertisingLO7The Largest U.S. Advertisers, 2010CompanyAdvertising Spending Millions of $Procter & Gamble$3124General Motors 2131AT&T 2093Verizon 1823News Corp. 1368Pfizer 1229Time Warner 1194Johnson & Johnson 1140Ford Motor 1132L’Oreal 1112Source: Advertising Age, www.adage.comMcGraw-Hill/Irwin9-*Negative Effects of AdvertisingCan be manipulativeContains misleading claims that confuse consumersConsumers pay high prices for a good while forgoing a better, lower-priced, unadvertised version of the productLO79-*Global SnapshotLO7The World’s Top 10 BrandsCoca-ColaIBMMicrosoftGoogleGeneral ElectricMcDonald’sIntelAppleDisneyHewlett-Packard9-*Oligopoly and EfficiencyOligopolies are inefficientProductively inefficient P > min ATCAllocatively inefficient P > MCQualificationsIncreased foreign competitionLimit pricingTechnological advanceLO79-*Oligopoly in the Beer IndustryThe beer industry is now an oligopoly Changes in demandChange in tastesConsumed at home and mass producedChanges in supplyTechnological advanceEconomies of scaleLO29-*
