After reading this chapter, you should be able to: List the characteristics of monopolistic competition, explain why monopolistic competitors earn only a normal profit in the long run, describe the characteristics of oligopoly, discuss how game theory relates to oligopoly,. | Monopolistic Competition and Oligopoly 11 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Four Market Models LO1 Characteristics of the Four Basic Market Models Characteristic Pure Competition Monopolistic Competition Oligopoly Monopoly Number of firms A very large number Many Few One Type of product Standardized Differentiated Standardized or differentiated Unique; no close subs. Control over price None Some, but within rather narrow limits Limited by mutual inter-dependence; considerable with collusion Considerable Conditions of entry Very easy, no obstacles Relatively easy Significant obstacles Blocked Nonprice competition None Considerable emphasis on advertising, brand names, trademarks Typically a great deal, particularly with product differentiation Mostly public relation advertising Examples Agriculture Retail trade, dresses, shoes Steel, auto, farm implements Local utilities 11- Monopolistic Competition Relatively large number of sellers Differentiated products Easy entry and exit Advertising LO1 11- Monopolistically Competitive Industry concentration Measured by: Four-firm concentration ratios Percentage of 4 largest firms Herfindahl index Sum of squared market shares LO1 4-Firm CR = Output of four largest firms Total output in the industry HI = (%S1)2 + (%S2)2 + (%S3)2 + . + (%Sn)2 11- Price and Output in Monopolistic Comp Demand is highly elastic Short run profit or loss Produce where MR=MC Long run normal profit Entry and exit Inefficient Product variety LO2 11- The Short Run: Profit or Loss LO2 Quantity Price and Costs MR = MC MC MR D1 ATC Economic Profit Q1 A1 P1 0 11- The Short Run: Profit or Loss LO2 Quantity Price and Costs MC MR D2 ATC Loss Q2 A2 P2 0 MR = MC 11- The Long Run: Only a Normal Profit LO2 Quantity Price and Costs MC MR D3 ATC Q3 P3= A3 0 MR = MC 11- Monopolistic Competition: Efficiency Inefficient Productive inefficiency P > ATC | Monopolistic Competition and Oligopoly 11 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Four Market Models LO1 Characteristics of the Four Basic Market Models Characteristic Pure Competition Monopolistic Competition Oligopoly Monopoly Number of firms A very large number Many Few One Type of product Standardized Differentiated Standardized or differentiated Unique; no close subs. Control over price None Some, but within rather narrow limits Limited by mutual inter-dependence; considerable with collusion Considerable Conditions of entry Very easy, no obstacles Relatively easy Significant obstacles Blocked Nonprice competition None Considerable emphasis on advertising, brand names, trademarks Typically a great deal, particularly with product differentiation Mostly public relation advertising Examples Agriculture Retail trade, dresses, shoes Steel, auto, farm implements Local utilities 11- Monopolistic Competition Relatively large .
