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Unformatted text preview: 11/7/2010 1 Monopolistic Competition and Oligopoly Chapter 11 Characteristics: 1) 1) Small market shares Small market shares No collusion No collusion Independent action Independent action 2) 2) Product attributes Product attributes Service Service Location Location Brand names and packaging Brand names and packaging Some control over price Some control over price 11-2 3) 3) Because monopolistic competitors are typically small firms, economies of scale are few and capital requirements are low. 4) 4) The goal of non-price competition is to make price less of a factor in consumer purchases and make product differences a greater factor. 11-3 Degree of concentration Degree of concentration: the extent to which the largest firms accounts for the bulk of the industrys output. Two measures: a) Four-firm concentration ratio b) Herfindahl index: sum of the squared percentage market shares of all firms in the industry Four-firm concentration ratio = Output of 4 largest firms Total output in the industry Herfindahl index = (%S 1 ) 2 + (%S 2 ) 2 + (%S 3 ) 2 +E + (%S n ) 2 Bade & Parkin(2009) ssentials of conomics Like a monopoly, At profit maximizing output, marginal cost will be less than price Marginal revenue is below price Like a perfect competitor, zero economic profits exist in the long run The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve 16-6 11/7/2010 2 Firms demand curve Highly elastic. Because the monopolistically competitive seller has many competitors producing closely substitutable goods. The E d depends on the number of rivals and the degree of product differentiation. 11-7 Q P ATC Break even Q MC D MR A monopolistic firm can earn profits, losses, or break even in the short run Determining Profits Graphically: Monopolistic Competition Losses Break even Profits P ATC Losses ATC Profits ATC L ATC P 16-8 Profits in the short-run: Firms Enter Highly elastic Competition will reduce economic profits, until the demand is tangent to the ATC: Normal profits....
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