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Chapter 9 - Monopolistic competition and oligopoly. In this chapter, the two market structures that fall between the extremes are discussed. Monopolistic competition contains a considerable amount of competition mixed with a small dose of monopoly power. Oligopoly, in contrast, implies a blend of greater monopoly power and less competition.
Chapter Monopolistic Competition and Oligopoly McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Monopolistic Competition • Relatively large number of sellers • Differentiated products • Easy entry and exit • Advertising 92 Price and Output in Monopolistic Competition • Demand is highly elastic • Short-run profit or loss • Produce where MR = MC • Long-run normal profit • Entry and exit • Inefficient • Product variety LO2 93 The Short Run: Profit or Loss Price and Costs MC ATC P1 A1 Economic Profit D1 MR = MC MR Q1 Quantity LO2 94 The Short Run: Profit or Loss Price and Costs MC ATC A2 P2 Loss D2 MR = MC MR Q2 Quantity LO2 95 The Long Run: Only a Normal Profit MC Price and Costs ATC P3= A3 D3 MR = MC MR Q3 Quantity LO2 96 Monopolistic Competition: Efficiency • Inefficient • Productive inefficiency • P > ATC • Allocative inefficiency • P > MC LO2 97 Monopolistic Competition: Efficiency P = MC = ATC for pure competition (recall) P4 Price is lower Excess capacity at minimum ATC Q4 Monopolistic competition is not efficient LO2 98 Product Variety • • LO2 The firm constantly manages price, product, and advertising • Better product differentiation • Better advertising The consumer benefits by greater array of choices and better products • Types and styles • Brands and quality 99 Oligopoly • • • • • LO3 A few large producers Homogeneous or differentiated products Limited control over price • Mutual interdependence • Strategic behavior Entry barriers Mergers 910 KinkedDemand Theory • Noncollusive oligopoly • Uncertainty about rivals’ reactions • Rivals match any price change • Rivals ignore any price change • Assume combined strategy • Match price reductions • Ignore price increases LO5 914 KinkedDemand Curve MC1 D2 P0 e MR2 MC2 f g D1 Q0 LO5 MR1 915 KinkedDemand Curve • Criticisms • Explains inflexibility, not price • Prices are not that rigid • Price wars LO6 916 Price Leadership Model • Price leadership • Dominant firm initiates price • • LO6 changes • Other firms follow the leader Use limit pricing to block entry of new firms Possible price war 917 Collusion • Cartel • Overt collusion • Covert collusion • Joint-profit maximization LO6 918 Collusion MC P0 ATC A0 MR=MC Economic profit MR D Q0 LO6 919 Overt Collusion • Cartels: a group of firms or nations • • LO6 that collude • Formally agree to the price • Set output levels for members Collusion is illegal in the United States OPEC 920 Obstacles to Collusion • Demand and cost differences • Number of firms • Cheating • Recession • New entrants • Legal obstacles LO6 921 Oligopoly and Advertising • Prevalent to compete with product development and advertising • Less easily duplicated than a price change • Financially able to advertise LO7 922 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 923 Oligopoly and Advertising The Largest U.S Advertisers, 2010 Company Procter & Gamble Advertising Spending Millions of $ $3124 General Motors 2131 AT&T 2093 Verizon 1823 News Corp 1368 Pfizer 1229 Time Warner 1194 Johnson & Johnson 1140 Ford Motor 1132 L’Oreal 1112 LO7 McGraw-Hill/Irwin Source: Advertising Age, www.adage.com 924 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, lowerpriced, unadvertised version of the product 925 Global Snapshot The World’s Top 10 Brands Coca-Cola IBM Microsoft Google General Electric McDonald’s Intel Apple Disney Hewlett-Packard LO7 926 Oligopoly and Efficiency • Oligopolies are inefficient • Productively inefficient P > ATC • Allocatively inefficient P > MC • Qualifications • Increased foreign competition • Limit pricing • Technological advance LO7 927 Oligopoly in the Beer Industry • The beer industry is now an oligopoly • Changes in demand • Change in tastes • Consumed at home and mass • LO2 produced Changes in supply • Technological advance • Economies of scale 928 ... of new firms Possible price war 9 17 Collusion • Cartel • Overt collusion • Covert collusion • Joint-profit maximization LO6 9 18 Collusion MC P0 ATC A0 MR=MC Economic profit MR D Q0 LO6 9 19. .. • Long-run normal profit • Entry and exit • Inefficient • Product variety LO2 9 3 The Short Run: Profit or Loss Price and Costs MC ATC P1 A1 Economic Profit D1 MR = MC MR Q1 Quantity LO2 9 4 The Short Run: Profit or Loss... unadvertised version of the product 9 25 Global Snapshot The World’s Top 10 Brands Coca-Cola IBM Microsoft Google General Electric McDonald’s Intel Apple Disney Hewlett-Packard LO7 9 26 Oligopoly and Efficiency