Economics 211 Chapter 10 - Monopolistic Competition and Oligopolies

Where does monopolistic competition sit?

In between perfect competition and monopoly

Ex: clothing, food, hotel rooms, haircuts

What is the key to success in monopolistic competition?

Product differentiation (it gives the firm some control over price (market power))

What are two types of advertising?

Informational → Informs consumers about aspects of a product and reduces search costs

Persuasive → Influences consumers’ emotions and tends to drive up the cost of prodcts

Monopolistic Competition

Monopolistically Competitive Firms face a downward-sloping curve that is relatively flat due to competition

What are the five steps to maximizing profit for Monopolistic Competition?

Step 1: Find MR=MC

Step 2: Find optimal Q

Step 3: Find optimal P (at demand)

Step 4: Find ATC

Step 5: Find profit

Long-Run Adjustments

If firms are earning positive economic profit, new firms will enter the industry

Competition reduces the demand for each individual seller, shifting the demand curve to the left

In the long-run, each seller earns a normal profit, so that price equals average total cost

In the long-run, what is the summary for Monopolistic Competition?

Monopolistically Competitive Firms earn no economic profit: P=ATC

Where does oligopoly sit?

To the right of monopolistic competition, but to the left of monopoly

Ex: Oil industry

Cartels

An agreement between firms (or countries) to formally collude on price and output, then agree on the distribution of output.

Cartels reduce overall supply to increase prices and profit

Stability of Cartels

Cartels are most stable when;
→ They have few members and each member has similar goals

→ They are maintained with legal provisions

→ Firms are unable to differentiate their products

→ Each firm has a similar cost structure

→ There are significant barriers to entry