Unit 3 Microeconomics:Prices and Markets

Chapters 7.3

EconomicsMr. Biggs

Monopolist Competitionand Oligopoly

Perfect competition and monopoly are two extreme market structures and very few markets fall into these categories.Most markets fall into the following two categories:

• Monopolistic competition• Oligopoly

Monopolist CompetitionMonopolist competition - A market structure in which many companies sell products that are similar but not identical.Prices will be higher than in perfect competition.For example, Jeans are all denim pants, but they are different enough to provide competition.

Four Conditions of Monopolistic Competition

• Many firms• Few artificial barriers to entry• Slight control over price• Differentiated products

Differentiation - Making a product different from other similar products.

Nonprice CompetitionNonprice competition - A way to attract customers through style, service, or locations but not a lower price.Nonprice competition takes several different forms:

• Physical characteristicsNew size, color, shape, texture, or taste

• LocationHome location or gas station in the desert

• Service levelHigh level of service

• Advertising, image, or statusDesigner hand bags

Price, Outputs, and ProfitsMonopolistic competition looks very much as it would under perfect competition.

PriceMonopolistic competition prices will be higher than perfect competition prices, but lower than monopoly prices.

OutputTotal output under monopolistic competition falls between perfect competition and monopoly.

ProfitMonopolistically competitive firms can earn profits in the short run, but they have to work hard to keep their products distinct to stay ahead of their rivals.

Production Costs and VarietyMonopolistically competitive firms provide a large variety of goods, but not at the lowest cost.

OligopolyOligopoly - A market structure in which a few large firms dominate the market.If the four largest firms produce 70-80% of the market output, then it is an oligopoly market.The biggest firms in an oligopoly may set prices higher and output lower than in a perfectly competitive market.For example, breakfast cereals, air travel, and household appliances.

Barriers to EntryLack of license or patent, high start up costs, economy of scale, or competition with larger companies are all barriers to entry.

Cooperation and CollusionOligopolies often seem to engage in collusion, even if its not true. Three practices that concern governments are:

• Price leadership can be started when a market leader

makes its pricing plans clear to the other firms.

• Price war - A series of competitive price cuts that lowers the market price below the cost of production.

• Collusion - An agreement among firms to divide the market, set price, or limit production.

Price fixing - One outcome of collusion which is an agreement among firms to charge one price for the same good.

CartelsCartel - A formal organization of producers that agree to coordinate price and production.Cartels only work if every member keeps to the agreed output levels.For example, the Organization of the Petroleum Exporting Countries (OPEC) is a cartel of twelve developing countries.Cartels are illegal in the United States.Comparison of market structures:

The End