12 Monopolistic Competition and Oligopoly

12 Monopolistic Competition and Oligopoly - MONOPOLISTIC...

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Unformatted text preview: MONOPOLISTIC COMPETITION, OLIGOPOLY, AND COLLUSION 12 11/9/2009 1 Econ 100A Mortimer Overview: Monopolistic Competition and Oligopoly monopolistic competition Market in which firms can enter freely, each producing its own brand or version of a differentiated product. oligopoly Market in which only a few firms compete with one another, and entry by new firms is impeded. cartel Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits. Econ 100A Mortimer 11/9/2009 2 Overview: Monopolistic Competition and Oligopoly Econ 100A Mortimer Product Differentiation Number of Firms Many Few One Dominant One Firms produce identical products Perfect competition Homogeneous products oligopoly (e.g., U.S. salt market, DRAM) Dominant firm (e.g., light bulbs- GE) Monopoly Firms produce differentiated products Monopolistic competition (e.g., physician services, video rentals) Differentiated products oligopoly (e.g., U.S. cola market) N/A 11/9/2009 3 MONOPOLISTIC COMPETITION 1. Firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes. 2. There is free entry and exit : it is relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their products become unprofitable. 3. There are many sellers and buyers. e.g., restaurants, flower shops Econ 100A Mortimer 11/9/2009 4 Key Characteristics of Monopolistic Markets MONOPOLISTIC COMPETITION Equilibrium in the Short Run and the Long Run Econ 100A Mortimer D is downward sloping (i.e., market power) In the short run, At q* where MR=MC, P > AC and > 0 In the long run, New firms enter and demand curve shifts downward. P = AC and = 0 P q 11/9/2009 5 MONOPOLISTIC COMPETITION Monopolistically Competitive LR Equilibrium and Perfectly Competitive LR Equilibrium Under monopolistic competition P > MC Deadweight loss but product diversity P > min LAC Econ 100A Mortimer Under perfect competition, P=MC. No deadweight loss P = min LAC 11/9/2009 6 P P q q OLIGOPOLY 1. the products may or may not be differentiated. 2. only a few firms account for most or all of total production. 3. some or all firms earn substantial profits over the long run because barriers to entry make it difficult or impossible for new firms to enter. e.g., automobiles, steel, aluminum, petrochemicals, electrical equipment, and computers. Econ 100A Mortimer 11/9/2009 7 Key Characteristics of Oligopolistic Markets OLIGOPOLY Nash Equilibrium Each firm will want to do the best it can given what its competitors are doing, and these competitors will do the best they can given what that firm is doing. Thus, they have no reason to change their price or output....
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12 Monopolistic Competition and Oligopoly - MONOPOLISTIC...

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