Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly Concentration

Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly

Concentration Ratios • One measure the degree of competition in an industry is its concentration ratio. • An industry’s concentration is the percentage market share of the top firms in the industry. • The concentration ratio of the “n” top firms is: Total Sales of the top “n” Firms CRn = Total Industry’s Sales 100

An Example Four-firm and eight-firm concentration ratios are more commonly used, concentration ratios can be calculated for any number of top firms. 20 and 50 firm concentration ratios are particularly useful when comparing industries with larger number firms. • In the US there are 48 manufacturers of breakfast cereal with the total sales of $9099 million. The top 4 companies sales amount to $7543 million. The 4 -firm concentration ratio for this industry is (7543/9099). 100= 82. 9 (See Table 11. 5, page 447< in the book. )

Monopolistic Competition • Many firms producing differentiated products • Each firm would face a downward-sloping demand curve • The 15 -minute fame • To maximize profit the firm set its estimated MR equal to its MC • The firm may enjoy a short-run profit • In the long run due to the emergence of substitutes the demand starts to shrink

A Monopolistically competitive Firm’s Market Share $ P 1 P 2 MS MS` Q Q 1 Q 2 Q 3

$ p 1 p 2 p 3 MS 1 MS 2 A Monopolistically Competitive Firm’s Demand Curve MS 4 MS 5 MS 3 a c b d e p 4 p 5 f d 0 Q q 1 Qo q 2 q 3 q 4 MR`

$ P MS a SMC b d 0 Q Q 1 Q 2 MR

$ MS Short-Run Equilibrium: A Monopolistically Competitive Firm SMC Pe c a SATC b d` 0 Q Qe MR`

$ Long-Run Equilibrium: A Monopolistically Competitive Firm LMC LAC P=LAC Pe d o qe MR Q

Oligopolies • A market with a few firms each large enough to have an effect on the price • Interdependence among firms • Each firm would try to guess its competitor’s reaction to its pricing strategy • Relative price stability • Different Oligopoly models • The Kinked Demand Curve Model • The Game Theory

$ d` The Kinked Demand Curve Pe a MC 4 MC 3 MC 2 d MC 1 0 D Qe MR Q

$ A Duopoly with a Superior Firm Pb MCb Pa MCa D` o Qb Qa QT MR` D Q

$ Sf , MCf MCL Pb e DL g QL a Pe Pf h Dm MRL Qe. L Leader Qm Qes Qem 0 Market Demand Small Firms’ Supply