Download Market structures between perfect competition and pure monopoly

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Market structures between perfect competition and pure monopoly
Monopolistic competition
Examples
Characteristics
1. Numerous sellers and buyers
2. Heterogeneous products
3. Free entry and exit
4. Perfect information
The only difference between the monopolistic competition and
prefect competition is in the nature of the goods produced.
Heterogeneity implies each firm’s product has some uniqueness, or
somewhat special.
The demand for the firm’s product is downward sloping.
P
D
0
Qi
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Competition and the incentive to advertise.
P
D
0
Qi
Hypothetical case: A McDonald’s restaurant
The Short-run Equilibrium.
P
MC
ATC
Short-run
profit
P
D
0
Q*
Q for Big Mac
MR
2
The Long-run case
Free Entry and Exit
Positive profits made by the incumbent McDonald’s will attract
more firms into the industry. Thus pushing the demand for Big
Mac inward.
P
D
0
Q of Big Mac
The Long-Run Equilibrium
P
MC
ATC
P = ATC
D
0
Q
Q*
MR
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In the long run:
MC = MR
P = ATC which implies profit = 0.
What happens if the incumbent firms are running losses
Remarks on the monopolistic competition:
1. Excessive capacity
Not at the minimum ATC
2. Inefficiency
Not at the point where MU = MC
3. Yet it provides a variety of goods and offer a wide range of
choice, which benefits consumers.
Oligopoly
Characteristics
1. A few firms in the industry
2. Heterogeneous goods
3. Some barriers of entry
4. Information may not be perfect (especially about the
rival’s goods)
Examples:
1. Airline companies
2. Automobile
3. Steel
4. Camera films.
5. Oil
etc.
They are usually big companies.
1. Interdependence
2. Heterogeous products.
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A subdiscipline in Economics: Industral Organization
Game Theory
Kinked Demand Curve Model
Explaines the price rigidity in the oligopolistic market
P
D
Qi*
Qi
The firm will set the price of its product at P, at the kink, and
produce Q*.
Because the possible reactions of its rivals:
If it raises the price above P, the quantity of sales will fall
substantially.
If it cuts the price below P, the quantity of sales will not increase
significantly.
It is wise for the firm to stick to price P, even as the input prices
fluctuate.
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