monopolistic competition

Monopolistic competition

1. Relatively large number of sellers

2. Differentiated products

3. Very limited amount of control over the market price

4. Relatively easy entry into and exit from the market

5. There is non-price competition like advertising, promotion.

Short-run profit maximization

In monopolistic competition, each firm must choose a price, quantity and degree of product differentiation to maximize profits. Profits may be negative, zero or positive in the short-run.

Rules for profit maximization

1. The firm must select output for which MR = MC

2. The firm should produce in the short - run if price exceeds average cost

Oligopoly

1. Few sellers

2. There is mutual interdependence among the few sellers

3. Products sold maybe homogenous or differentiated

4. There is a rigid price

5. There maybe a price leader

6. There are some barriers to entry into the market

7. There is non-price competition

Duopoly

Only two sellers

Pure oligopoly

Sell homogenous products

Differentiated oligopoly

sell differentiated products

Sources of Oligopoly

1. Economies of scale

2. Huge capital investments and specialized inputs

3. Few firms own a patent for the exclusive right to produce a commodity or to use a particular production process

4. Established firms may have a loyal following of customers based on product quality and service.

5. Few firms own and control the supply of raw materials required in production

6. Government may give a franchise to only a few firms to operate in the market.

Kinked Demand Curve Model

-Introduced by Paul Sweezy in 1939 to explain the price rigidity in oligopolistic models.

-He postulated that if an oligopolist raise its price. It would lose most of its customers because other firms would not follow by raising their prices.

-An oligopolist could not increase its share in the market by lowering its price because competitors would quickly match price cuts.

Collusion

a secret agreement entered into by firms who decide to act together.

Collusion advantages

1. Increased profits

2. Decreased uncertainty

3. Better opportunity to block entry of new firms

Cartel

a formal organization of firms in the industry which seeks to maximize profit through price and output regulation

Market sharing cartel

gives each member the exclusive right to operate in a particular geographical area.

Centralized cartel

a formal agreement among the oligopolistic producers of a product to set the monopoly price, allocate output among its members, and determine how profits are to be shared.