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CHAPTER TWENTY-FIVE MONOPOLISTIC COMPETITION AND OLIGOPOLY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. List the characteristics of monopolistic competition. 2. Determine the profit-maximizing price and output level for a monopolistic competitor in the short run when given cost and demand data. 3. Explain why a monopolistic competitor will only realize a normal profit in the long run. 4. Identify the reasons for excess capacity in monopolistic competition. 5. Explain how product differentiation may offset these wastes. 6. Enumerate the principal types of nonprice competition. 7. Describe the characteristics of an oligopolistic industry. 8. Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry. 9. Differentiate between homogeneous and differentiated oligopolies. 10. Identify and explain the most important causes of oligopoly. 11. Use a profit-payoffs matrix (game theory) to explain the mutual interdependence of two rival firms. 12. Identify three possible models of oligopolistic price-output behavior. 13. Use the kinked demand curve theory to explain inflexible prices. 14. List the major advantages of collusion for an oligopolist, three types of collusion, and obstacles to collusion. 15. Explain price leadership as a form of tacit collusion. 16. Explain how firms use cost-plus pricing to determine prices of their products. 17. Explain why oligopolies may prefer nonprice competition over price competition. 18. List three common forms of nonprice competition in oligopolistic industries. 19. List the positive and negative effects of advertising. 20. Define and explain the terms and concepts listed at the end of the chapter. LECTURE NOTES I. Monopolistic Competition: Characteristics and Occurrence A. Monopolistic competition refers to a market situation with a relatively large number of sellers offering similar but not identical products. 1. Each firm has a small percentage of the total market . 2. Collusion is nearly impossible with so many firms . 317
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Monopolistic Competition and Oligopoly 3. Firms act independently with no feeling of mutual interdependence among the sellers. The actions of one rival are ignored by the others. B. Product differentiation makes this model different from pure competition model. Economic rivalry takes the form of nonprice competition. 1. Product differentiation may be physical (qualitative). 2. Services and conditions accompanying the sale of the product are important aspects of product differentiation. 3. Location is another type of differentiation. 4. Brand names and packaging lead to perceived differences. 5. Product differentiation allows producers to have some control over the prices of their products. C.
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This note was uploaded on 02/09/2009 for the course ECON 004 taught by Professor Mateer during the Fall '08 term at Northwestern.

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