Download Monopolistic competition and oligopoly

Monopolistic competition and
oligopoly
Monopolistic competition
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Many firms compete in open market
Products are similar but not identical
Low barriers to entry
Some control over prices
Monopolistic competition is like
a modified type of perfect
competition with differences in
products
Product differentiation is the key
difference
Firms under monopolistic competition
try not to compete on price alonenonprice compeititon
• Different physical characteristics- size,
shape, color, texture, taste
• Location or availability
• Service level
• Advertising, image, status
Oligopoly
• Market dominated by a few large,
profitable firms- 4 largest firms produce at
least 70-80% of output
• Some variety of products
• High barriers to entry
• Have some control over prices
Oligopolies exist
• Usually because of significant barriers to
entry (auto industry or steel industry)
• Economies of scale
Oligopolistic firms can illegally work
together to set prices and bar
competing firms from entering the
market
• Price leadership- price increases and cuts
followed by others
• Collusion- agreement to set prices and
production levels (price fixing)
• Cartels-agreement by a formal organization of
producers to set prices and production
OPEC
Regulation and Deregulation
• Markets dominated by one or a few large
firms tend to have higher prices and lower
output than competitive markets
• Mergers and cartels can lead to
anticompetitive behavior
• Predatory pricing-setting market prices
below costs for the short term to drive
competitors out of business
Predatory pricing
Antitrust legislation
• Trust- illegal grouping of companies that
discourage competition
• Sherman Antitrust Act- outlaws mergers
and monopolies that limit trade
• Clayton Antitrust Act- outlaws practices
that limit competition or lead to monopoly
Regulating anticompetitive
business practices
Breaking up monopolies
Breaking up monopolies
Blocking mergers
Deregulation
Analysis of deregulation
• Has led to lower prices and less red tape
• Safety issues and business practices may
be questionable
• Many mergers have followed, leading to a
less competitive environment