Chapter 15: Monopolistic Competition and Oligopoly

What two types of market structures are imperfectly competitive?

1) Monopolistic Competition

2) Oligopoly

Oligopoly

a market with only a few firms, which sell a similar good or service

What are two examples of oligopolies?

wireless network providers (4: AT&T, Verizon, T-mobile, Sprint) and fast-food burgers (McDonald's, Burger King, Wendy's)

What is one of the defining features of an oligopoly and why isn't it present in a perfectly competitive market or a monopoly?

strategic interactions between a firm and its rivals have a major impact on its success: the price and quantity set by an individual firm affects others' profits

P.C. market: other firms' actions cannot affect the market

True Monopoly: THERE ARE NO OTHER FIRMS

What do oligopolies and monopolies have in common?

barriers to entry

Monopolistic Competition

a market with many firms that sell goods and services that are similar, but slightly different

What is the difference between an oligopoly and monopolistic competition?

Oligopoly is about the number of firms

Monopolistic Competition is about variety of products

Product Differentiation

the creation of products that are similar to competitors' products but more attractive in some ways

How do monopolistic firms behave in the short-run?

like monopolists

IN THE SHORT RUN, where is the profit-maximizing quantity? Price?

Quantity: MC=MR

Price: THE POINT ON THE DEMAND CURVE that corresponds to the profit-maximizing quantity

Can a monopolistically competitive firm earn positive economic profits in the short run? If so, how?

Yes, by behaving like a monopolist and producing at the point where marginal revenue equals marginal cost

What is one huge problem monopolistically competitive firms face that monopolists DO NOT?

other firms can enter the market

In the long run, how is a monopolistically competitive market similar to a perfectly competitive market?

Profits are driven to zero (firms make zero economic profits)

What does zero profit mean?

price is equal to average total cost (ATC)

P=ATC represents profit-maximizing quantity and is the optimal production point in the long-run

In the long run, how is a monopolistically competitive market similar to a monopoly?

-Downward-sloping demand curve

-MR&MC

(LR) what 2 important implications does a monopolistically competitive firm's different features (differences from a P.C. market and monopoly) have?

1) Monopolistically competitive firms operate at a smaller-than-efficient scale

2) Monopolistically competitive firms want to sell more

What point on the ATC scale do firms in a perfectly competitive market produce at vs. firms in a monopolistically competitive market?

P.C.-> lowest point on ATC curve

M.C.-> point on ATC curve that touches demand curve (always on decreasing section of ATC)

What does monopolistic competition motivate?

continual innovation

How does competition between oligopolists make it like a perfectly competitive market?

it drives price and profits down to below the monopoly level, however, oligopolistic competition doesn't necessarily drive profits all the way down to the efficient level like P.C.

Quantity Effect

an additional unit of output sold at a price above marginal cost increases the firm's profit

Price Effect

an additional unit of output raises the total quantity in the market and drives down the market price. The firm receives a lower price and therefore lower profit for each unit it sells

What happens when the quantity effect outweighs the price effect?

an increase in output will raise a firm's profit level (profit-maximizing firms will increase their output)

What happens when price effect outweighs the quantity effect?

the firm has no incentive to increase output

Who does an oligopolist's production decisions effect?

its own profits AND the profits of other firms

What happens when an individual reaps all of the benefits and all of the costs of a decision?

he will rationally make an optimal choice

What happens when a decision imposes costs or benefits on others?

an individual's choice will not necessarily be optimal for the group (externalities)

Collusion

the act of working together to make decisions about price and quantity

Dominant Strategy

a strategy that is the best one for a player to follow no matter what strategy other players choose

Nash Equilibrium

an equilibrium reached when all players choose the best strategy they can, given the choices of all players

Cartel

a number of firms who collude to make collective production decisions about quantities or prices

What is an example of a well-known cartel?

Organization of the Petroleum Exporting Countries (OPEC)