Monopolistic Competition Characteristics Price and Output in Monopolistic

Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency 25 CHAPTER Superio r Cheese Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Monopolistic Competition and Oligopoly Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 1 Next Slide Copyright Mc. Graw-Hill/Irwin, 2005

FOUR MARKET MODELS Monopolistic Competition: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 2 Next Slide • Relatively Large Number of Sellers • Differentiated Products • Easy Entry and Exit Pure Competition Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Copyright Mc. Graw-Hill/Irwin, 2005

CHARACTERISTICS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 3 Next Slide Relatively Large Number of Sellers • Small Market Shares • No Collusion • Independent Action Copyright Mc. Graw-Hill/Irwin, 2005

CHARACTERISTICS Differentiated Products Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 4 Next Slide • Product Attributes • Service • Location • Brand Names and Packaging • Some Control Over Price • Easy Entry and Exit • Advertising Copyright Mc. Graw-Hill/Irwin, 2005

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 5 Price and Costs Monopolistic Competition and Efficiency ATC P 1 A 1 Short-Run Economic Profits D MR Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Q 1 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Expect New Competitors MC Monopolistic Competition Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 6 Price and Costs Monopolistic Competition and Efficiency ATC New competition drives down the P price level – leading to economic A losses in the short run. 1 1 Short-Run Economic Profits D MR Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Q 1 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Monopolistic Competition MC Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 7 Price and Costs Monopolistic Competition and Efficiency ATC A 2 P 2 Short-Run Economic Losses D MR Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Q 2 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Monopolistic Competition MC Characteristics Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 8 A 2 P 2 With economic losses, firms will exit the market – stability occurs Short-Run when economic profits are zero. Price and Costs Monopolistic Competition and Efficiency ATC Economic Losses D MR Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Q 2 Quantity

PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION Long-Run Equilibrium MC Monopolistic Competition Characteristics Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 9 Price and Costs Price and Output in Monopolistic Competition P 3 = A 3 Normal Profit Only ATC D MR Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Q 3 Quantity

MONOPOLISTIC COMPETITION AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 10 Next Slide • Not Productively Efficient Minimum ATC • Not Allocatively Efficient Price MC • Excess Capacity Graphically… Copyright Mc. Graw-Hill/Irwin, 2005

MONOPOLISTIC COMPETITION AND EFFICIENCY Monopolistic Competition Long-Run Equilibrium Characteristics Price is Not = Minimum ATC Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 11 Price and Costs Price and Output in Monopolistic Competition MC ATC P 3 = A 3 Price MC D MR Next Slide Copyright Mc. Graw-Hill/Irwin, 2005 Q 3 Quantity

MONOPOLISTIC COMPETITION AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 12 Next Slide Product Variety • Benefits of Product Variety • Nonprice Competition • Advertising Role • Trial & Error Search for Maximum Profits Copyright Mc. Graw-Hill/Irwin, 2005

FOUR MARKET MODELS Oligopoly: Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 13 Next Slide • A Few Large Producers • Homogeneous or Differentiated Products • Control Over Price, But Mutual Interdependence • Strategic Behavior • Entry Barriers Pure Monopolistic Competition Oligopoly Pure Monopoly Market Structure Continuum Copyright Mc. Graw-Hill/Irwin, 2005

OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 14 Next Slide Mergers Measures of Industry Concentration • Concentration Ratio • Localized Markets • Interindustry Competition • World Trade • Import Competition Copyright Mc. Graw-Hill/Irwin, 2005

OLIGOPOLIES AND MERGERS Herfindahl Index Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 15 Next Slide Sum of the squared percentage market shares for all firms in the industry – Places greater weight upon the larger firms (%S 1)2 + (%S 2)2 + (%S 3)2 + … + (%Sn)2 A greater Herfindahl Index indicates a greater concentration of market power in the industry. (Pure competition is near zero. ) Copyright Mc. Graw-Hill/Irwin, 2005

OLIGOPOLIES AND MERGERS Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 16 Next Slide Mutual Interdependence Game-Theory Model Collusive Tendencies • Collusion Incentive to Cheat Introduction to Game Theory… Copyright Mc. Graw-Hill/Irwin, 2005

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 17 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 18 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8 Greatest Combined Profit

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 19 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8 Independent Actions Stimulate Response

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 20 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8 Independent Actions Stimulate Response Gravitating to the Worst Case

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 21 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8 Collusion Invites a Different Solution.

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 22 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8 Collusion Invites a Different Solution.

OLIGOPOLY BEHAVIOR A Game-Theory Overview Monopolistic Competition Characteristics Rare. Air’s Price Strategy Price and Output in Monopolistic Competition Oligopoly Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 23 Next Slide Uptown’s Price Strategy Monopolistic Competition and Efficiency High A $12 Low B $15 High $12 C $6 $6 D Low $15 Copyright Mc. Graw-Hill/Irwin, 2005 $8 $8 Collusion Invites a Different Solution. But, the incentive to cheat is very real.

THREE OLIGOPOLY MODELS No Standard Model due to. . . Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 24 Next Slide Diversity of Oligopolies Complications of Interdependence Alternative Models: 1 – Kinked Demand Curve 2 – Cartels and Collusion 3 – Price Leadership Copyright Mc. Graw-Hill/Irwin, 2005

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics The firm’s demand marginal revenue curves Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 25 Next Slide D 1 Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics The rival’s demand marginal revenue curves Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 26 Next Slide D 1 Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1 MR 2

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 27 Next Slide D 1 Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1 MR 2

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Rivals tend to follow a price cut or ignore a price increase Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 28 Next Slide D 1 Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1 MR 2

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics Effectively creating a kinked demand curve Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion D 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 29 Next Slide D 1 Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1 MR 2

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics Effectively creating a kinked demand curve Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 30 Next Slide D Quantity Copyright Mc. Graw-Hill/Irwin, 2005

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition Characteristics Effectively creating a kinked demand curve Price and Output in Monopolistic Competition and Efficiency MC 1 Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly MR 2 Cartels and Collusion MC 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 31 Next Slide D Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Profit maximization MR = MC occurs at the kink. Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency MC 1 Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly MR 2 Cartels and Collusion MC 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 32 Next Slide D Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY Monopolistic Competition This behavior can set off a price war. Characteristics Price and Output in Monopolistic Competition and Efficiency MC 1 Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Price Oligopoly MR 2 Cartels and Collusion MC 2 Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 33 Next Slide D Quantity Copyright Mc. Graw-Hill/Irwin, 2005 MR 1

CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 34 Next Slide Oligopoly is conducive to collusion. If a few firms face identical or highly similar demand costs. . . they will tend to seek joint profit maximization. Graphically… Copyright Mc. Graw-Hill/Irwin, 2005

CARTELS AND OTHER COLLUSION Colluding Oligopolists Will Split the Monopoly Profits. Economic Profit MC Monopolistic Competition Characteristics Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Price and costs Price and Output in Monopolistic Competition P 0 ATC A 0 D Key Terms Previous Slide End Show 25 - 35 Next Slide MR = MC MR Q 0 Copyright Mc. Graw-Hill/Irwin, 2005

CARTELS AND OTHER COLLUSION Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 36 Next Slide Overt Collusion • Cartels Defined • The OPEC Cartel Covert Collusion • Recent Examples • U. S. Illegality • Tacit Understandings Copyright Mc. Graw-Hill/Irwin, 2005

CARTELS AND OTHER COLLUSION Obstacles to Collusion Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 37 Next Slide • Demand Cost Differences • Number of Firms • Cheating • Recession • Potential Entry • Antitrust Law Copyright Mc. Graw-Hill/Irwin, 2005

PRICE LEADERSHIP MODEL Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 38 Next Slide Leadership Tactics • Infrequent Price Changes • Communications • Limit Pricing Breakdowns in Price Leadership-Price Wars Copyright Mc. Graw-Hill/Irwin, 2005

OLIGOPOLY AND ADVERTISING • Less Easily Duplicated Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 39 Next Slide • Adequate Resources • Positive Effects of Advertising • Potential Negative Effects of Advertising • Brand Development Copyright Mc. Graw-Hill/Irwin, 2005

OLIGOPOLY AND EFFICIENCY Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 40 Productive Efficiency P = Minimum ATC Oligopoly: No Productive Efficiency Allocative Efficiency P = MC Oligopoly: No Allocative Efficiency Next Slide Qualifications Copyright Mc. Graw-Hill/Irwin, 2005

monopolistic competition product differentiation nonprice competition excess capacity oligopoly homogeneous oligopoly differentiated oligopoly strategic behavior mutual interdependence concentration ratio Copyright Mc. Graw-Hill/Irwin, Inc. 2005 interindustry competition import competition Herfindahl index game-theory model collusion kinked-demand curve price war cartel tacit understandings price leadership BACK END

Next. . . Monopolistic Competition Characteristics Price and Output in Monopolistic Competition and Efficiency Oligopolies and Mergers Three Oligopoly Models Kinked-Demand Theory Cartels and Collusion Price Leadership Oligopoly and Efficiency Key Terms Previous Slide End Show 25 - 42 Next Slide Technology, R&D, and Efficiency Chapter 26 Copyright Mc. Graw-Hill/Irwin, 2005