chapter 12 notes - Monopolistic Competition and Oligopoly...

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Monopolistic Competition and Oligopoly CHAPTER TWELVE MONOPOLISTIC COMPETITION AND OLIGOPOLY LECTURE NOTES I. Review Table 23-1. II. Monopolistic Competition: Characteristics and Occurrence A. Monopolistic competition refers to a market situation in which a relatively large number of sellers offer 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. 3. Firms act independently; the actions of one firm are ignored by the other firms in the industry. B. Product differentiation and other types of nonprice competition give the individual firm some degree of monopoly power that the purely competitive firm does not possess. 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. Similar to pure competition, under monopolistic competition firms can enter and exit their industries relatively easily. D. Examples of real-world industries that fit this model are found in Table 12-1. III. Monopolistic Competition: Price and Output Determination A. The firm’s demand curve is highly, but not perfectly, elastic. It is more elastic than the monopoly’s demand curve because the seller has many rivals producing close substitutes. It is less elastic than in pure competition, because the seller’s product is differentiated from its rivals, so the firm has some control over price. B. In the short-run situation, the firm will maximize profits or minimize losses by producing where marginal cost and marginal revenue are equal, as was true in pure competition and monopoly. The profit-maximizing situation is illustrated in Figure 12-1a, and the loss-minimizing situation is illustrated in Figure 12-1b. C. In the long-run situation, the firm will tend to earn a normal profit only, that is, it will break even (Figure 12-1c). 1. Firms can enter the industry easily and will if the existing firms are making an economic profit. As firms enter the industry, this decreases the demand curve facing an individual firm as buyers shift some demand to new firms; the demand curve will shift until the firm just breaks even. If the demand shifts below the break-even point (including a normal profit), some firms will leave the industry in the long run. 2. If firms were making a loss in the short run, some firms will leave the industry. This will raise the demand curve facing each remaining firm as there are fewer substitutes for 85
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Monopolistic Competition and Oligopoly buyers. As this happens, each firm will see its losses disappear until it reaches the break-even (normal profit) level of output and price.
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