Market StructuresMarket Structures

Monopolistic Competition and Monopolistic Competition and OligopolyOligopoly

Monopolistic CompetitionMonopolistic Competition

Many companies compete in an open Many companies compete in an open market to sell products that are similar but market to sell products that are similar but not identical.not identical.

Each firm holds a monopoly over its own Each firm holds a monopoly over its own particular product.particular product.

Modified version of perfect competition Modified version of perfect competition with minor differences in productswith minor differences in products

Monopolistic CompetitionMonopolistic Competition

Goods are similar enough to be Goods are similar enough to be substituted for one another but they’re not substituted for one another but they’re not identical.identical.

Does not involve identical commoditiesDoes not involve identical commodities Examples:Examples:

Bagel shops, ice cream shops, gas stations, Bagel shops, ice cream shops, gas stations, fast food restaurantsfast food restaurants

Four Conditions of Monopolistic Four Conditions of Monopolistic CompetitionCompetition

1.1. Many firmsMany firms

2.2. Few artificial barriers to entry into the Few artificial barriers to entry into the marketmarket

3.3. Slight control over priceSlight control over price

4.4. Differentiated productsDifferentiated products

Four Conditions of Monopolistic Four Conditions of Monopolistic CompetitionCompetition

Differentiation enables a monopolistically Differentiation enables a monopolistically competitive seller to profit from the competitive seller to profit from the differences between his or her products differences between his or her products and competitors’ products.and competitors’ products.

Nonprice CompetitionNonprice Competition

Competition through other ways other Competition through other ways other than lower prices.than lower prices.

1.1. Physical characteristics – a new size, Physical characteristics – a new size, color, shape, texture or tastecolor, shape, texture or taste

2.2. Location – “location, location, location”Location – “location, location, location”

3.3. Service level – fast food v. casual dining Service level – fast food v. casual dining restaurantsrestaurants

4.4. Advertising, image, or statusAdvertising, image, or status

Price, Output, and ProfitsPrice, Output, and Profits

Prices are higher but not as high as in a Prices are higher but not as high as in a true monopolytrue monopoly

Output and price are negatively related. Output and price are negatively related. Falls somewhere between monopoly and Falls somewhere between monopoly and

perfect competitionperfect competition Earn just enough profit to cover all of their Earn just enough profit to cover all of their

costs.costs.

OligopolyOligopoly

Describes a market dominated by a few Describes a market dominated by a few large, profitable firms.large, profitable firms.

Looks like an imperfect form of monopolyLooks like an imperfect form of monopoly If the four largest firms produce 70 to 80 If the four largest firms produce 70 to 80

percent of the output.percent of the output.

OligopolyOligopolyBarriers to EntryBarriers to Entry

Government licenses or patentsGovernment licenses or patents High start-up costsHigh start-up costs Economies of scaleEconomies of scale Image and brand nameImage and brand name

OligopolyOligopoly

Many government regulations try to makeMany government regulations try to make

oligopolistic firms act more like competitiveoligopolistic firms act more like competitive

firms.firms. Three practices that concern Three practices that concern

government:government:1.1. Price leadershipPrice leadership

2.2. CollusionCollusion

3.3. CartelsCartels

OligopolyOligopoly

Price leaders can set prices and output for Price leaders can set prices and output for an entire industry (if others go along)an entire industry (if others go along)

Collusion is an agreement among Collusion is an agreement among members of an oligopoly to set prices and members of an oligopoly to set prices and output level – sets prices like a monopolyoutput level – sets prices like a monopoly

A Cartel an agreement by a formal A Cartel an agreement by a formal organization of producers to coordination organization of producers to coordination prices and production. – illegal in the U.S.prices and production. – illegal in the U.S.