monopolistic competition & oligopolies

monopolistic competition characteristics:

- many sellers

- product differentiation (price markers, downward sloping demand curve)

- free entry and exit

short-run monopolistic competition equilibrium

profit maximization in the SR is when:

- MR = MC

- price: on the demand curve

- P > ATC; profit

- P < ATC; loss

- monopoly like

mono.comp earning profits in the SR:

- at each 'Q', MR < P

- 'Q' is where MR = MC

- demand curve sets P

mono.comp tossing profits in the SR:

- P< ATC at the output where MR = MC

mono.comp in the LR equilibrium when making a profit in the SR:

- new firms have an incentive to enter the market

- reduces demand faed by each firm

- each firm profit declines to zero

mono.comp in the LR equilibrium when making a loss in the SR:

- some firms exit the market, so remaining firms enjoy higher demand and prices

entry of new firms in mono.comp in the LR:

this effects previous firms demand curve:

- shift to the left: selling fewer of each good at each price

- demand curve will become more elastic: losing sales if raising prices

mono.comp graph in the LR:

entry and exit occurs until P = ATC and P = 0

- firms will charge a markup of price over MC and does not produce at ATC

why mono.comps are less efficient than perf.comps:

mono.comps:

- excess capacity: quantity is not at minimum ATC

- markup over MC: P > MC

perf.comps:

- quantity: at minimum ATC

- P = MC

2 differences between mono.comp and perf.comp:

1. mono.comp firms charge a price greater than MC

2. they do not produce at minimum ATC

adverting in mono.comps:

product differentiation and markup pricing lead naturally to use of advertising

critiques of advertising:

1. firms advertise to manipulate people's taste

2. advertising impedes competition

3. waste resources

defense of advertising:

- provides useful information to buyers

- informed buyers can more easily find and exploit price differences

- advertising promotes competition and reduces market power

oligopoly characteristics:

- few sellers

- many barriers

- sellers know competition will reach to its changes in prices & quantities

- must always consider rivals

- product differentiation

- own high % of market

- incentives to collude/cheat

oligopoly models:

1. cartel/collusion theory

2. kinked demand curve theory

3. price leadership

4. game theory

cartel/collusion model

oligopolists act as they are alone in the industry

- organization of firms reduce output and increase price to increase joint profits

kinked demand curve model

the DC facing each individual firm has a "kink" in it

- assumption that if one firm lowers price, other firms raise prices and others will not follow suit

price leadership model

the dominant industry firm determines price and all other firms take this price as given

game theory

oligopolies follow each other, so they must strategize:

- considers the strategic decisions of "players" in anticipation of their rivals reactions

- illustrates a profit matrix