Cha_13 - 13 Chapter MONOPOLISTIC COMPETITION AND OLIGOPOLY...

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13 MONOPOLISTIC COMPETITION AND OLIGOPOLY C h a p t e r K e y I d e a s PC War Games A. In the market for PCs, the two largest firms, Dell and Hewlett-Packard compete ferociously between themselves. 1. These firms must pay close attention to the other firm’s pricing, promotion, and often actions. How does one firm’s actions affect the other firm? 2. These firms also, however, face competition from the many other firms in the PC market. How do Dell and Hewlett-Packard try to distinguish themselves from their many other competitors? B. Only two firms (Intel and Advanced Micro Devices) make nearly all of the processing chips that run our personal computers. Clearly they are not operating in a competitive environment, and both firms are large enough that the market is not a monopoly, either. 1. Does the decision making of one firm influence the decision making of the other? 2. If the two firms retain their respective market power, will they be able to remain profitable? 3. How would firms in a market with more than one dominant firm behave? O u t l i n e I. What is Monopolistic Competition? A. Monopolistic competition is a market with the following characteristics: 1. A large number of firms compete. 2. Each firm produces a differentiated product. 3. Firms compete on product quality, price, and marketing. 4. Firms are free to enter and exit. B. The presence of a large number of firms in the market implies: C h a p t e r
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6 2 1. Each firm supplies only a small part of the total industry output and so has only limited power to influence the price of its product. 2. Each firm is sensitive to the average market price but pays no attention to any one individual competitor. 3. No one firm can dictate market conditions and no one firm’s actions directly affect the actions of another. 4. Collusion, or conspiring to fix prices, is impossible. C. Firms in monopolistic competition practice product differentiation , which means that each firm makes a product that is slightly different from the products of competing firms. D. Product differentiation enables firms to compete in three areas: quality, price, and marketing. 1. The quality of a product is the physical attributes that make it different from the products of other firms. Examples include product design, reliability, and service. 2. Each firm faces a downward-sloping demand curve for its own product because each firm produces a differentiated product. This allows each firm to set its own price. The price is related to quality: A higher quality product allows the firm to set a higher price. 3. A firm in monopolistic competition must market its product because all other firms offer differentiated products. This fact means the product must be marketed using advertising and packaging. E.
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Cha_13 - 13 Chapter MONOPOLISTIC COMPETITION AND OLIGOPOLY...

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