Chapter 16 Notes - [ChapterSixteen LearningObjectives After...

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[Chapter Sixteen] Monopolistic Competition and Oligopoly Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. List the four distinguishing characteristics of monopolistic competition. 2. Demonstrate graphically the equilibrium of a monopolistic competitor. 3. State the central element of oligopoly. 4. Explain why decisions in the cartel model depend on market share and decisions in the contestable market model depend on barriers to entry. 5. Describe two empirical methods of determining market structure. Chapter Outline Monopolistic Competition and Oligopoly Market Structure: “The physical characteristics of the market within which firms interact.” Monopolistic Competition: “A market structure in which there are many firms selling differentiated products and few barriers to entry.” Oligopoly: “A market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account.” Characteristics of Monopolistic Competition Four distinguishing characteristics: many sellers, differentiated products, multiple dimensions of competition, easy entry of new firms in the long run. Many Sellers In monopolistic competition, firms don’t take into account rivals’ reactions.
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Example: when Ivory decides to run a sale, it won’t spend a lot of time thinking about Old English’s reaction. There are too many firms for them to concern themselves with reactions of any specific firm. In contrast: when GM changes its price, it takes into consideration what Ford’s reaction may be. Product Differentiation Product differentiation gives monopolistic competition its monopolistic aspect. Example: Irish Spring is slightly different from Ivory, which in turn is slightly different from Yardley’s Old English. In one sense, each firm has a monopoly, but that monopoly is fleeting. Examples: Bleach differs little from brand to brand. The author buys generic. Ketchup is made from same basic ingredients, but differs among brands (in the author’s view). Multiple Dimensions of Competition Product differentiation reflects firms’ attempt to compete on perceived attributes. Firms also compete through advertising. Other dimensions include service and distribution outlets. Alternative methods of competition follow the same two general decision rules: compare marginal costs and marginal benefits; change that dimension of competition until marginal costs equal marginal benefits. Ease of Entry of New Firms in the Long Run In monopolistic competition, if there were long-run economic profits, other firms would enter until no economic profit existed. Output, Price, and Profit of a Monopolistic Competitor A good introduction can be gained by considering monopolistic competition within the standard two-dimensional (price, quantity) graph.
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