Download Monopolistic Competition and Oligopoly

Monopolistic Competition and
Oligopoly
Objectives
 Students will describe characteristics and give examples of
monopolistic competition
 Students will explain how firms compete without lowering
prices
 Students will understand how firms in a monopolistically
competitive market set output
 Students will describe characteristics and give examples of
oligopoly
Monopolistic Competition
 Monopolistic Competition – market structure
where many companies sell products that are
similar but not identical
 Most common market structure in the United
States
Four Conditions of Monopolistic
Competition
 Many firms
 Number of sellers is smaller than in perfect competition
 Consumers have many different but similar varieties of products
from which to choose
 Prices not identical, but competitive
 No single seller has a large enough share of the market to
control prices completely
Four Conditions of Monopolistic
Competition
 Few artificial barriers to entry
 Not as easy as entry into a perfectly competitive market
 Slight control over price
 Since the product is differentiated and distinguished from
others, there is a certain amount of control over prices
Four Conditions of Monopolistic
Competition
 Differentiated products
 Distinguished from others in some manner – brand name, style,
etc.
 Differences can be real or imagined – customers may think a
particular product is better and thus are willing to pay a higher
price
 A very important characteristic of monopolistic competition
 Perfect competition – no differentiation
 Monopolies – have no incentive for differentiation
Non-Price Competition
 Way to attract customers through style, service, or
location, but not a lower price
 Examples
 Physical characteristics
 Location
 Service level
 Advertising, image, or status
Oligopoly
 Oligopoly – market structure characterized by a few large
firms of an identical or differentiated product and difficult
market entry
Oligopoly
 Characteristics of oligopoly:
 Big business structure in which firms aggressively compete
(many manufacturing industries)
 Few sellers – competition among the few – sometimes three or
four firms dominate the market
 Action by one firm generally causes a reaction by the others
Oligopoly
 Characteristics of oligopoly:
 Can be identical or differentiated products
 Examples – steel produced by one steel company is pretty much the same
as the steel produced by another steel company (steel companies are
generally considered oligopolies), but cars produced by one car company
are often quite different than those of another)
 Oligopolists often compete using advertising to display product
differentiation rather than with pricing (advertising budgets quite large in
these industries – soft drinks, athletic shoes, auto’s, etc)
Oligopoly
 Characteristics of oligopoly:
 Difficult entry
 Significant financial requirements
 Control over an essential resource
 Patent rights
 Other legal barriers
 Pricing – have some control
Oligopoly
 Characteristics of oligopoly:
 Cooperation and Collusion
 Price War – a pricing campaign designed to capture additional market
share by repeatedly cutting prices
 Collusion – rival companies cooperate for their mutual benefit
 Price fixing – agreement by competing companies to sell the same
product at the same price
 Cartels – an association of producers who agree to set common prices
and quotas to prevent competition. Illegal in the United State, but not in
many other nations.