mc _o_
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Monopolistic Monopolistic Competition & Competition & OligopolyOligopoly
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OutlineOutline
I. Introduction
A. Where Does Monopolistic Competition “fit in”?
B. Assumptions of Monopolistic Competition
II. Monopolistic Competition
A. Short Run
B. Long Run
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Outline (Cont.)Outline (Cont.)
III. Long Run Conditions
A. Excess Capacity
B. Product Differentiation
C. Allocative and Productive Efficiency
IV. Oligopoly
A. Where Oligopoly “fits in”
B. Assumptions
C. Concentration Ratios
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Outline (Cont.)Outline (Cont.)
V. Models of Oligopoly
A. Cartel Theory
B. Game Theory
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Where Does Monopolistic Where Does Monopolistic Competition “fit in?”Competition “fit in?”
Perfect Competition Monopoly
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Where Does Monopolistic Where Does Monopolistic Competition “fit in?”Competition “fit in?”
Perfect Competition Monopoly
MonopolisticCompetition
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Assumptions of Monopolistic Assumptions of Monopolistic CompetitionCompetition
• Many buyers and sellers (as opposed to monopoly)
• Firms produces a similar, yet unique product (gives us downward sloping demand)
• Ease of entry and exit
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Examples of Monopolistically Examples of Monopolistically Competitive MarketsCompetitive Markets
• Pizza Places (Pizza Hut, Dominos)
• Hairdressers
• Grocery Stores (IGA, Kroger, Meijer)
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Monopolistic Competition in the Monopolistic Competition in the Short RunShort Run
• Looks and Acts Like Monopoly• Faces Downward Sloping Demand and MR• Produces where MR=MC and may make a
profit.
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Monopolistic Competition in the Monopolistic Competition in the Short RunShort Run
MCP
Q5
$10
D
0 1 2 3 4
24
6
8
MR
ATC
AVCatc*
p*
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Monopolistic Competition in the Monopolistic Competition in the Long RunLong Run
• Firm Demand Shifts Back and Gets More Elastic.• Demand Shifts Back Because More Firms Enter
the Industry, So There is Less Demand Per Firm.
• Demand Gets More Elastic Because More Firms Means More Substitutes and More Substitutes Means More Elastic
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Monopolistic Competition in the Monopolistic Competition in the Long RunLong Run
• Like Perfect Competition, Firms Will Continue to Enter Until There are No More Profits to Attract Them.
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Monopolistic Competition in the Monopolistic Competition in the Long RunLong Run
MCP
Q5
$10
D
0 1 2 3 4
24
6
8
MR
ATC
AVCatc*p*=
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Long Run Conditions of Long Run Conditions of Monopolistic CompetitionMonopolistic Competition
• Excess Capacity
• Product Differentiation
• Efficiency
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Excess CapacityExcess Capacity
• Excess Capacity is the Difference Between The Long Run Perfectly Competitive Quantity Produced and the Long Run Monopolistically Competitive Quantity Produced.
• Generally Speaking, There Will be Excess Capacity in the Long Run of Monop. Competition.
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Excess CapacityExcess Capacity
P
Q
D
0MR
MC
P*
ATCAVC
Q
Excess Capacity
Q
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Product DifferentiationProduct Differentiation
• The More That a Firm Can Differentiate Their Product, The More Inelastic The Demand Becomes.
• Thus, Profits Can Be Sustained.
• This is the Role of Advertising.
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EfficiencyEfficiency
• Productive Efficiency– Generally, A Monopolistically Competitive
Firm is not Productively Efficient, since it is not producing at the bottom of it’s ATC curve
• Allocative Efficiency– Generally, A Monopolistically Competitive
Firm is not Allocatively Efficient, since there is excess capacity.
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OligopolyOligopoly
• For a Market to be Described as Oligopolistic, it must satisfy the following conditions:– Few Sellers, Many Buyers (more like
Monopoly).– The Firm’s products may be identical or unique– The are Barriers to Entry (like monopoly)
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Where Does Oligopoly “fit in?”Where Does Oligopoly “fit in?”
Perfect Competition Monopoly
MonopolisticCompetition
Oligopoly
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Concentration RatiosConcentration Ratios
• One Way to Determine Whether a Market is Oligopolistic is to look at a Concentration Ratio
• A Concentration Ratio Let’s Us Know if the Whole Industry’s Sales are Dominated by the Sales of a Few Firms.
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• The X-Firm Concentration Ratio is the Percentage of Industry Sales Accounted for by the Sales of the Top X Firms in the Industry:
• Sales of the Top X Firms
Total Industry Sales
The X-Firm Concentration RatioThe X-Firm Concentration Ratio
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Models of OligopolyModels of Oligopoly
• Cartel Theory: The Oligopolists Get Together (Since There are So Few of Them) and Act As If They Were One Monopolist and Collectively Produce the Monopolistic Quantity - Thus Maximizing Profit
• Example: OPEC
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Problems With CartelsProblems With Cartels
• Generally, They Are Not Legal (Price Fixing)
• They Are Difficult to Organize and Monitor
• Can’t Force New Firms to Join
• Cheating
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The Incentive to Cheat On A The Incentive to Cheat On A CartelCartel
• If the Cartel Maintains the Monopoly Price, The Individual Member of the Cartel Can Act Like a Price Taker (They Can Sell All They Want at the Market Price)
• As a Price Taker, They Maximize Profit Where MC=MR.
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The Incentive to Cheat On A The Incentive to Cheat On A Cartel (Cont.)Cartel (Cont.)
• This Quantity is Greater Than the Cartel Wants the Individual Firm to Produce.
• All Firms in the Cartel Do This and the Cartel Falls Apart
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Qcheater
The Incentive to Cheat On A The Incentive to Cheat On A CartelCartel
Firm
$ $
Q
DMR
MC
P
Q Q
MC ATC
MR
Market
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Game TheoryGame Theory
• Game Theory is a Technique That Allows Us to Examine The Strategies of Oligopolists
• This Technique Allows Us to Determine the Best Strategy for a Oligopolist if the Other Oligopolists are Aware of the All of Avaliable Strategies
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Example - The Prisoner’s Example - The Prisoner’s DilemmaDilemma
Consider the Following Story:
• Bill and Jill Have Cheated on an Exam
• They are Both Caught
• Bill in Prof. Platt’s Office and Jill is Prof. Lage’s Office
• Each Are Told That Their Punishment Will Be Somewhat Lighter if They Confess
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Example - The Prisoner’s Example - The Prisoner’s Dilemma (Cont.)Dilemma (Cont.)
• They Both Know That if They BOTH Admit Nothing, it Will Be Tough to Prove That They Cheated
• They Can’t Communicate With Each Other
• What Do They Do?
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Example - The Prisoner’s Example - The Prisoner’s DilemmaDilemma
Bill Confesses
Bill is Silent
Jill ConfessesJill is Silent
They Are Both Suspended For a Year, Fail the Class andTranscipts are Noted.
They Fail The Classand Their Transcriptis Noted
Jill Fails,Bill is Expelled
Bill Fails,Jill is Expelled
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How Does The Prisoner’s How Does The Prisoner’s Dilemma Apply to Oligopoly?Dilemma Apply to Oligopoly?
• A Cartel Can only Hold Together if Everyone Sticks to Producing the Monopoly Quantity
• But a Cheater Benefits More Than the Others - Much Like Confession By Bill or Jill Alone, Benefits One More Than the Other.
• But if They All Know This -- They All Cheat and the Cartel Falls Apart.