Monopolistic competition and oligopoly Monopolistic competition Many firms

Monopolistic competition and oligopoly

Monopolistic competition • • 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