E251x.F11.W13.Monopolistic Competition Oligopoly

E251x.F11.W13.Monopolistic Competition Oligopoly - ECON...

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ECON 251x Chapter 12 Week 13
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CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus Collusion: The Prisoners’ Dilemma 12.5 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing 12.6 Cartels
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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.
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MONOPOLISTIC COMPETITION 1. Differentiated Products: 1. Firms products are close substitutes for one another but not perfect substitutes. 2. The cross-price elasticities of demand are large but not infinite. 2. Free entry and exit : 1. Relatively easy for new firms to enter the market with their own brands. 2. Relatively easy for existing firms to leave if their products become unprofitable.
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MONOPOLISTIC COMPETITION Economic Profits in the Short Run Because the firm is the only producer of its brand, it faces a downward-sloping demand curve. Price exceeds marginal cost and the firm has monopoly power. In the short run, described in part (a), price also exceeds average cost, and the firm earns profits shown by the yellow-shaded rectangle.
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MONOPOLISTIC COMPETITION Equilibrium in the Short Run and the Long Run Long run Adjustment: Profits attract new firms with competing brands. The firm’s market share falls, and its demand curve shifts downward. Long-run equilibrium, described in part (b), Price equals average cost. The firm earns zero profit even though it has monopoly power.
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MONOPOLISTIC COMPETITION Monopolistic Competition and Economic Efficiency Under perfect competition, price equals marginal cost. The demand curve facing the firm is horizontal, so the zero-profit point occurs at the point of minimum average cost. Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium Figure 12.2
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Monopolistic Competition and Economic Efficiency Under monopolistic competition, price exceeds marginal cost. Thus there is a deadweight loss, as shown by the yellow-shaded area. The demand curve is downward-sloping, so the zero-profit point is to the left of the point of minimum average cost. Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium In both types of markets, entry occurs until profits are driven to zero. In evaluating monopolistic competition, these inefficiencies must be balanced against the gains to consumers from product diversity.
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MONOPOLISTIC COMPETITION TABLE 12.1 Elasticities of Demand for Brands of Colas and Coffee Brand Elasticity of Demand Colas Royal Crown –2.4 Coke –5.2 to –5.7 Ground coffee Folgers –6.4 Maxwell House –8.2 Chock Full o’Nuts –3.6 With the exception of Royal Crown and Chock Full o’ Nuts, all the
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E251x.F11.W13.Monopolistic Competition Oligopoly - ECON...

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