Monopolistic Competition and Oligopoly

1
Monopolistic Competitionand Oligopoly
2
FOUR MARKET MODELS
Monopolistic Competition

• Relatively Large Number of Sellers
• Differentiated Products
• Easy Entry and Exit

3
CHARACTERISTICS

• Relatively Large Number of Sellers
• Small Market Shares
• No Collusion
• Independent Action

4
CHARACTERISTICS

• Differentiated Products
• Product Attributes
• Service
• Location
• Brand Names and Packaging
• Some Control Over Price
• Easy Entry and Exit
• Advertising

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PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
Expect New Competitors
MC
Yippee, an economic profit, good times ahead.
ATC
P1
A1
Price and Costs
Short-Run Economic Profits
D
MR
Q1
Quantity
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PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
Going out of business sale
MC
ATC
A2
P2
Short-Run Economic Losses
Price and Costs
D
MR
Q2
Quantity
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PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION
MC
Long-Run Equilibrium
Normal Profit Only
ATC
P3 A3
Price and Costs
D
MR
Q3
Quantity
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MONOPOLISTIC COMPETITION AND EFFICIENCY

• Not Productively Efficient
• ? Minimum ATC
• Not Allocatively Efficient
• Price ? MC
• Excess Capacity

Graphically
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MONOPOLISTIC COMPETITION AND EFFICIENCY
MC
Long-Run Equilibrium
ATC
P3 A3
Price and Costs
D
MR
Q3
Quantity
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KINKED DEMAND THEORY NONCOLLUSIVE OLIGOPOLY
The rivals demand and marginal revenue curves
Price
D2
MR2
D1
MR1
Quantity
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KINKED DEMAND THEORY NONCOLLUSIVE OLIGOPOLY
Rivals tend to follow a price cut
Price
D2
MR2
D1
MR1
Quantity
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KINKED DEMAND THEORY NONCOLLUSIVE OLIGOPOLY
Rivals tend to follow a price cut or ignore
a price increase
Price
D2
MR2
D1
MR1
Quantity