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Chap 011
Chap 011
McGraw-Hill/Irwin
Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of firms
A very large
number
Many
Few
One
Type of product
Standardized
Differentiated
Standardized or
differentiated
Unique; no
close subs.
Control over
price
None
Limited by mutual
inter-dependence;
considerable with
collusion
Considerable
Conditions of
entry
Very easy, no
obstacles
Relatively easy
Significant
obstacles
Blocked
Nonprice
competition
None
Considerable emphasis
on advertising, brand
names, trademarks
Typically a great
deal, particularly
with product
differentiation
Mostly public
relation
advertising
Examples
Agriculture
Local utilities
LO1
11-2
Monopolistic Competition
LO1
11-3
Monopolistically Competitive
Industry concentration
Measured by:
Four-firm concentration ratios
Percentage of 4 largest firms
4-Firm CR =
Herfindahl index
Sum of squared market shares
HI = (%S1)2 + (%S2)2 + (%S3)2 + . +
(%Sn)2
LO1
11-4
11-5
MC
ATC
P1
A1
Economic
Profit
D1
MR = MC
MR
Q1
Quantity
LO2
11-6
MC
ATC
A2
P2
Loss
D2
MR = MC
MR
0
Q2
Quantity
LO2
11-7
ATC
P3= A3
D3
MR = MC
MR
0
Q3
Quantity
LO2
11-8
Inefficient
Productive inefficiency
P > ATC
Allocative inefficiency
P > MC
LO2
11-9
MC
ATC
P3= A3
P4
Price is Lower
D3
MR = MC
Excess Capacity at
Minimum ATC
0
Q3
MR
Q4
Quantity
11-10
Product Variety
LO2
Oligopoly
LO3
products
Limited control over price
Mutual interdependence
Strategic behavior
Entry barriers
Mergers
11-12
Oligopolistic Industries
11-13
LO4
11-14
LO4
High
2 competitors
2 price
strategies
Each strategy
has a payoff
matrix
Greatest
combined
profit
Independent
actions
stimulate a
response
$12
Low
B
$15
High
$12
$6
$6
$8
Low
$15
$8
11-15
LO4
High
Independently
lowered prices in
expectation of
greater profit
leads to worst
combined
outcome
Eventually low
outcomes make
firms return to
higher prices.
$12
Low
B
$15
High
$12
$6
$6
$8
Low
$15
$8
11-16
Kinked-demand curve
Collusive pricing
Price leadership
Reasons for 3 models
Diversity of oligopolies
Complications of interdependence
LO5
11-17
Kinked-Demand Curve
Rivals Ignore
Price Increase
MC1
P0
f
D2
Q0
Quantity
LO5
P0
e
MR2
MC2
MR2
Rivals Match g
Price Decrease
0
Price
Price
D2
g
D1
MR1
D1
0
Q0
MR1
Quantity
11-18
Kinked-Demand Curve
Criticisms
Explains inflexibility, not price
Prices are not that rigid
Price wars
LO6
11-19
MC
P0
ATC
A0
MR=MC
Economic
Profit
Q0
LO6
MR
Quantity
11-20
Overt Collusion
LO6
that collude
Formally agreeing to the price
Sets output levels for members
Collusion is illegal in the United
States
OPEC
11-21
Obstacles to Collusion
LO6
11-22
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
11-23
LO7
11-24
Advertising
Positive Effects
Negative Effects
Can be manipulative
Enhances competition
LO7
11-25
11-26