ZPR PWr Zintegrowany Program Rozwoju Politechniki Wrocawskiej Oligopoly

„ZPR PWr – Zintegrowany Program Rozwoju Politechniki Wrocławskiej” Oligopoly and Monopolistic Competition dr hab. inż. Grzegorz Chodak, prof. PWr.

Plan 1. 2. 3. 4. 5. 6. Characteristics of a monopolistically competitive market Short-run and long-run equilibrium Product differentiation, advertising and location decisions Oligopoly - characteristics Kinked demand curve model Prisoners’ dilemma

Characteristics of a monopolistically competitive market Many buyers and sellers Differentiated products Easy entry and exit

Relationship to other market structures Monopolistic competition is similar to perfect competition in that: ◦ There are many buyers and sellers ◦ There are no barriers to entry or exit Monopolistic competition is similar to monopoly in that: ◦ Each firm is the sole producer of a particular product (although there are close substitutes) ◦ The firm faces a downward sloping demand curve for its product

Monopolistic competition examples Source: https: //boycewire. com/monopolistic-competition/

Demand curve facing a monopolistically competitive firm To sell more a firm has to decrease the price Source: http: //www. oswego. edu/~kane/eco 101. htm

Low barriers to entry and exit New entrants are easily able to enter as there are none or very insignificant barriers to entry. The cost to start a new business is relatively low and the risk involved in failing is also comparatively low. The incentive to enter the market is high. There are more firms who are able and willing to compete.

The firm’s demand curve and entry and exit � As new firms enter a monopolistically competitive market, the demand facing a typical firm declines and becomes more elastic. Source: http: //www. oswego. edu/~kane/eco 101. htm

Short-run equilibrium in a monopolistically competitive industry Economic profits lead to entry of new competitors and a reduction in the demand facing a typical firm. Source: http: //www. oswego. edu/~kane/eco 101. htm

Long-run equilibrium in a AC monopolistically competitive market � Entry zero continues until economic profit equals

Product differentiation and advertising Monopolistically competitive firms may receive short-run economic profit from successful: ◦ product differentiation ◦ advertising. These profits are, however, expected to disappear in the long run ◦ as other firms copy successful innovations.

Location decisions Monopolistically competitive firms often locate near each other ◦ to appeal to the “median” customer in a geographical region. ◦ e. g. , fast food restaurants, car dealers.

Oligopoly a small number of firms produce most output a standardized or differentiated product recognized mutual interdependence entry barriers.

Examples of Oligopoly

Strategic behavior occurs when the best outcome for one firm ◦ depends upon the actions and reactions of other firms.

Kinked demand curve model Other firms are assumed to match price decreases, but not price increases. A B MC AC C MR O Q D

Game theory examples Examines the payoffs associated with alternative choices of each participant in the “game. ” Prisoners’ dilemma Duopoly pricing game

Shared monopoly Joint profits are higher when firms behave as a shared monopoly Cartel agreement is illegal in the U. S. and UE A cartel arrangement can maximize industry profits Each firm can try to increase its profits by violating the agreement

Market concentration In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market. Alternative terms are industry concentration and seller concentration

Herfindahl-Hirschman Index (HHI) The Herfindahl-Hirschman Index (HHI) is a measure of market concentration. It is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. It can range from close to zero to 10, 000.

Bibliography: http: //www. oswego. edu/~kane/eco 101. htm Czarny B. „Podstawy ekonomii”, PWE, 2002 https: //boycewire. com/monopolistic-competition/ https: //boycewire. com/oligopoly-definition/ https: //www. thinglink. com/scene/6798408529393 74594 https: //antyweb. pl/orange-plus-play-t-mobile-kto -buduje-najlepszy-obraz-w-sieci/ https: //www. investopedia. com/terms/h/hhi. asp https: //en. wikipedia. org/wiki/Market_concentratio n

Discussion topics 1. 2. 3. 4. 5. Characterize monopolistic competition How firms compete on monopolistically competitive market Give the examples and characterize Polish oligopolies. Give the examples and characterize world oligopolies. What is strategic behaviour on oligopolistic market.