Monopolistic 9. 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 sum square of % market share used by Justice Department if monopoly
= (100)2 = 10,000
HHI (cont.)
if < 1000
market is competitive if > 1800 market is uncompetitive
Oligopoly
small number of firms interdependent behavior barriers to entry
examples
Airlines Automobiles Cereal Soft Drinks
what types of barriers?
economies of scale
auto industry legal restrictions brand recognition cereal, soft drinks control over essential resource
Firm behavior
no one model of behavior set of possible behaviors
Cartel
firms collude to act like a single
monopolist restrict output, charge higher price block entry
Price leadership
informal collusion dominant firm sets price
other firms follow to avoid a price war steel, airline, auto industries
cartels are tough to maintain
each firm has output quota each firm tempted to cheat tough to block new entry
Collusion and Cartels
firms may collude
divide market fix prices illegal in U.S. examples OPEC ADM & others
Monopolistic Competition
large # of firms product differentiation w/ compete quality, price, marketing no one firm dominates no collusion among firms free to enter/exit
examples
running shoes fast food franchises clothing cleaning supplies beauty products
product differentiation
physical differences
color, size, taste ... location convenience, drug stores services delivery image high quality vs. value
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
P, cost
MC
$70
D MR 150 Q (jeans/day)
economic profit P, cost MC
C AT
($70-$20)(150) = $7500
$70 $20 MR 150
D Q (jeans/day)
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
firms output is not at minimum of
ATC output too small loss of economic welfare
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
between perfect competition &
monopoly monopolistic comp. chooses P & Q like a monopolistic oligopolist behavior interdependent importance of product differentiation importance of strategic behavior