macroeconomic mcgrowhill micro ch 11 19e use this one

11 Monopolistic Competition and Oligopoly McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Objectives Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms End Show 11-2 • Characteristics of Monopolistic Competition • Why Monopolistic Competitors Earn Only a Normal Profit in the Long-Run • Characteristics of Oligopoly • How Game Theory Relates to Oligopoly • Why the Demand Curve of the Oligopolist May Be Kinked • Incentives and Obstacles to Collusion Among Oligopolists • Potential Positive and Negative Effects of Advertising Copyright 2008 The McGraw-Hill Companies Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms FOUR MARKET MODELS Monopolistic Competition: • Relatively Large Number of Sellers • Differentiated Products • Easy Entry and Exit Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum End Show 11-3 Copyright 2008 The McGraw-Hill Companies Monopolistically Competitive • Industry concentration • Measured by: • Four-firm concentration ratios • Percentage of largest firms 4-Firm CR = Output of four largest firms Total output in the industry • Herfindahl index • Sum of squared market shares HI = (%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2 LO1 11-4 Low Concentration Industries (1) Industry (2) 4-Firm Concentration Ratio (3) Herfindahl Index (1) Industry (2) 4-Firm Concentration Ratio (3) Herfindahl Index 14 114 Asphalt paving 25 207 Metal windows and doors Plastic pipe 24 262 Women’s dresses 13 84 Textile bags 24 263 Ready mix concrete 11 63 Bolts, nuts, and rivets 24 205 Wood trusses 10 50 Plastic bags 23 240 Stone products 10 59 Quick printing 22 319 Metal stamping 31 Textile machinery 20 206 Wood pallets 24 Sawmills 18 117 Sheet metal work 25 Jewelry 16 117 Signs 19 Curtains and draperies 16 111 Retail bakeries LO1 11-5 Monopolistic Competition Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word • Easy Entry and Exit • Advertising –Nonprice Competition • Monopolistically Competitive Industries Key Terms End Show 11-6 Copyright 2008 The McGraw-Hill Companies O 11.1 Monopolistic Competition Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms End Show 11-7 • Characteristics – Small Market Shares – No Collusion – Independent Action • Differentiated Products – Product Attributes – Service – Location – Brand Names and Packaging – Some Control Over Price Copyright 2008 The McGraw-Hill Companies O 11.1 Price and Output Determination In Monopolistic Competition Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word • The Firm’s Demand Curve – highly elastic • The Short Run: –Profit or Loss • The Long Run: –Only a Normal Profit –Profits: Firms Enter –Losses: Firm’s Leave • Complications Key Terms –Product Variety End Show 11-8 Copyright 2008 The McGraw-Hill Companies G 11.1 Price and Output Determination In Monopolistic Competition Short-Run Profits MC Price and Costs Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word ATC P1 A1 Economic Profit D1 MR = MC MR Key Terms Q1 Quantity End Show 11-9 Copyright 2008 The McGraw-Hill Companies Price and Output Determination In Monopolistic Competition Short-Run Losses MC Price and Costs Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word ATC A2 P2 Loss D2 MR = MC MR Key Terms Q2 Quantity End Show 11-10 Copyright 2008 The McGraw-Hill Companies MC Price and Costs Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Cartels and Other Collusion • Price and Output –Collusion and Tendency Toward Joint-Profit Maximization P0 ATC A0 MR=MC Economic Profit Key Terms Effectively Sharing The Monopoly Profit D MR Q0 End Show Quantity 11-26 Copyright 2008 The McGraw-Hill Companies Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms End Show 11-27 Cartels and Other Collusion • Overt Collusion – Cartels – The OPEC Cartel GLOBAL PERSPECTIVE The 11 OPEC Nations Daily Oil Production, May 2006 Country Saudi Arabia Iran Venezuela UAE Nigeria Kuwait Iraq Libya Indonesia Algeria Qatar Copyright 2008 The McGraw-Hill Companies Barrels of Oil 9,099,000 4,110,000 3,233,000 2,444,000 2,306,000 2,247,000 1,903,000 1,500,000 1,451,000 894,000 726,000 Source: OPEC The OPEC Cartel Daily oil production (barrels) , November 2008 Saudi Arabia 8,904,000 Iran 3,843,000 Kuwait 2,538,000 Venezuela 2,368,000 Iraq 2,297,000 Nigeria 2,183,000 UAE 2,117,000 Angola 1,804,000 Libya 1,737,000 Algeria 1,417,000 Qatar 848,000 Indonesia 843,000 Ecuador 530,000 Source: A T Kearney, Foreign Policy 11-28 Global Perspective LO6 11-29 Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms Cartels and Other Collusion • Covert Collusion –Tacit Understandings • Obstacles to Collusion –Demand and Cost Differences –Number of Firms –Cheating –Recession –Potential Entry –Legal Obstacles: • Antitrust Law End Show 11-30 Copyright 2008 The McGraw-Hill Companies Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms Price Leadership Model • Leadership Tactics • Infrequent Price Changes • Communications • Limit Pricing • Breakdowns in Price Leadership: –Price Wars End Show 11-31 Copyright 2008 The McGraw-Hill Companies Oligopoly and Advertising Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms End Show 11-32 • Advertising Prevalent in Monopolistic Competition and Oligopoly • Positive Effects of Advertising • Potential Negative Effects of Advertising Copyright 2008 The McGraw-Hill Companies Oligopoly and Advertising • Prevalent to compete with product development and advertising • Less easily duplicated than a price change • Financially able to advertise LO7 11-33 Positive Effects of Advertising • Low-cost way of providing information • • • LO7 to consumers Enhances competition Speeds up technological progress Can help firms obtain economies of scale 11-34 Negative Effects of Advertising • Can be manipulative • Contains misleading claims that • LO7 confuse consumers Consumers pay high prices for a good while forgoing a better, lower priced, unadvertised version of the product 11-35 Oligopoly and Advertising The Largest U.S Advertisers, 2008 Company Advertising Spending Millions of $ Procter & Gamble $4831 ($4.8 Billion !) Verizon $3700 AT&T $3073 General Motors $2901 Johnson & Johnson $2529 Unilever $2423 Walt Disney $2218 Time Warner $2208 General Electric $2019 Sears $1865 Source: Advertising Age http://www.adage.com LO7 11-36 Global Perspective LO7 11-37 Oligopoly and Efficiency • Oligopolies are inefficient • Productively inefficient P > minATC • Allocatively inefficient P > MC • Qualifications • Increased foreign competition • Limit pricing • Technological advance LO7 11-38 Oligopoly in the Beer Industry Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word • Once Hundreds of Firms Now a Very Small Group • Demand Side Changes – Taste Shifts to Lighter Beers of Large Breweries – Shift From Tavern-Tap Consumption to Can or Bottles • Supply Side Changes – Technology Increased Minimum Efficient Scale Creating a Barrier to Entry – National Brands Enjoy Cost Advantages • Consolidation of Firms into Oligopoly Key Terms End Show 11-39 Copyright 2008 The McGraw-Hill Companies Key Terms Monopolistic C ompetition Monopolistic Co mpetition and E fficiency Oligopoly Game Theory Three Oligopol y Models Kinked Demand Curve Cartels and Oth er Collusion Price Leadersh ip Model Oligopoly and E fficiency Last Word Key Terms End Show 11-40 • monopolistic competition • product differentiation • nonprice competition • excess capacity • oligopoly • homogeneous oligopoly • differentiated oligopoly • strategic behavior • mutual interdependence • concentration ratio Copyright 2008 The McGraw-Hill Companies • interindustry competition • import competition • Herfindahl index • game-theory model • collusion • kinked-demand curve • price war • cartel • tacit understandings • price leadership ... 11 63 Bolts, nuts, and rivets 24 205 Wood trusses 10 50 Plastic bags 23 240 Stone products 10 59 Quick printing 22 319 Metal stamping 31 Textile machinery 20 206 Wood pallets 24 Sawmills 18 117 ... 206 Wood pallets 24 Sawmills 18 117 Sheet metal work 25 Jewelry 16 117 Signs 19 Curtains and draperies 16 111 Retail bakeries LO1 11- 5 Monopolistic Competition Monopolistic C ompetition Monopolistic... Word Key Terms • Strategies –Match Price Changes –Ignore Price Changes • A Combined Strategy • Price Inflexibility • The Kinked-Demand Curve Graphically… End Show 11- 23 Copyright 2008 The McGraw-Hill