Lecture 10 notes - Oligopoly and Monopolistic Competition:...

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BE 530 Page 1 of 6 Lecture 10 Oligopoly and Monopolistic Competition: Chapter Review Monopolistic competition shares some features of competition and monopoly: Many sellers: This is in common with competition. Product differentiation: This is in common with monopoly—each firm’s product is slightly different so each firm is a price maker and faces a downward-sloping demand for its product. Free entry: This is in common with competition—firms can enter or exit without restriction so economic profits are driven to zero. Examples of monopolistically competitive markets are the market for books, CDs, movies, restaurants, and so on. Monopolistically competitive markets are common. The market structure that lies between competition and monopoly is known as imperfect competition . One type of imperfectly competitive market is oligopoly —a market structure in which only a few sellers offer similar or identical products. Oligopoly differs from competition because in a competitive market the decisions of one firm have no impact on the other firms in the market while in an oligopolistic market, the decisions of any one firm may affect the pricing and production decisions of other firms in the market. Oligopolistic firms are interdependent. Competition with Differentiated Products Similar to a monopolist, a monopolistically competitive firm faces a downward-sloping demand curve for its product. Therefore, it follows the same rule for profit maximization as a monopolist—it produces the quantity at which marginal cost equals marginal revenue and then uses the demand curve to determine the price consistent with this quantity. In the short run, if the price exceeds average total cost, the firm makes economic profits. If the price is below average total cost, the firm generates losses. As in a competitive market, if the firm is making profits, new firms have incentive to enter the market. Entry reduces the demand faced by each firm already in the market (shifts their demand curves to the left) and reduces their profits in the long run. If the firm is generating losses, incumbent firms have incentive to exit the market. Exit increases the demand faced by each firm that remains in the market (shifts their demand curves to the right) and reduces their losses. Entry and exit continues until the firms in the market are making zero economic profits. In long-run equilibrium, the demand curve facing the firm must be tangent to the average-total-cost curve so that P = ATC and profits are zero. The long-run equilibrium for a monopolistically competitive firm exhibits the following:
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BE 530 Page 2 of 6 Lecture 10 As in monopoly, price exceeds marginal cost because profit maximization requires that MR = MC , and MR is always less than demand if demand is downward sloping.
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This note was uploaded on 07/15/2011 for the course ACC 360 taught by Professor Marshallhunt during the Spring '09 term at University of Michigan-Dearborn.

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Lecture 10 notes - Oligopoly and Monopolistic Competition:...

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