Econ 101: Chap. `10.1 - Monopolístic Competition and Oligopoly

Where do firms in imperfect competition lie?

Between perfectly competitive and the monopoly models.

Concentration ratio

• percentage of total output in the market supplied by the four largest firms

Who created the theory of imperfect competition and monopolistic competition?

• Edward Hastings Chamberlin (Harvard University)

• Joan Robinson of Cambridge University

• 1933

Oligopoly

• only a few sellers offer similar or identical products

Monopolistic

market structure in which many firms sell products that are similar but not identical

Imperfect Competition

• neither are perfectly competitive or monopolistic

Differentiated product

product that consumers perceive as distinctive in some way

Ways products can be differentiated

• physical features: product, location, marketing peculiarities, appeal to consumer loyalty

• non-physical features: intangible aspects

Perceived Demand for Firms - Perfect Competitor

• demand curve is perfectly elastic, suggesting that the competitive firm can sell all the output it wishes at the prevailing market price

Perceived Demand for Firms - Monopoly

• A monopoly faces the whole market demand, which can then sell more output only by decreasing the price it charges

Perceived Demand for Firms - Monopolistic Competitor

• displays a demand curve that is neither horizontal nor as steep as the monopoly’s

• Quantities sold by a firm are smaller than in the case of monopoly because its demand is only a fraction of the total market demand

Profit-Maximizing Output and Price of a Firm in Monopolistic Competition

• decides it’s profit-maximizing quantity and price in pretty much the same way as a monopolist

• faces a downward-sloping demand curve

• whether the firm makes a positive profit depends on how the price determined by the firm’s profit-maximizing quantity compares to the firm’s average cost

Entry and Exit

• if monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market

• entry of other firms into the same general market shifts the demand curve that a monopolistically competitive firm faces

Entry

• profit induces entry; shift to zero profit

• in the example shown, the figure is making a positive economic profit because the price at Q0 is above average cost (AC)

• positive economic profits attract competition firms to the industry, driving the original firm’s demand down to D, new equilibrium quantity, original firm is earning zero economic profits

Exit

• opposite of entry occurs

• at P0 and Q0, the firm is lowing money

• In this case, AC > price

• losses induce firms to leave the industry

• which then, demand for original firm rises to D1, where the firm is earning zero eoconimc profit.

Efficiency - Perfect Competition

Long-term result of entry and exit in a perfectly competitive market is that firms sell at the price level determined by the lowest point on the AC curve

• perfect competition generates productive efficiency, when goods are produced at the lowest possible average cost

Efficiency - Monopolistic Competition

• result of entry and exit is that fries end up with a price that lies on the downward-sloping portion of the AC curve, not at the very bottom of the AC curve

• therefore, this will not be productively efficient