Monopolistic Competition and Oligopoly
Essay by people • April 29, 2012 • Study Guide • 833 Words (4 Pages) • 1,674 Views
Chapter 13. Monopolistic Competition and Oligopoly
I. MONOPOLISTIC COMPETITION
Monopolistic Competition (market power based on product differentiation), features:
* Large number of relatively small firms acting independently
* Differentiated product
* Market entry and exit relatively easy
* Non-price competition very important
* Downward sloping demand for product
Examples of monopolistically competitive markets: fast food restaurants (McDonalds, Burger King, KFC), perfumes, clothing, sunglasses.
Product differentiation refers to a strategy that firms use to achieve market power. It is achieved by producing products that have distinct positive identities in the minds of consumers.
Product differentiation increases the demand for a product and/ or makes it less elastic (Figure 13.1).
Price/Output Decisions Under Monopolistic Competition
The determination of the profit-maximizing price and output under monopolistic competition is precisely the same as a firm operating under monopoly.
* Use the MR=MC rule
* In the long run, above normal profits invites entry.
* Entry of additional firms causes the demand curve for each existing firm to shift to the left (Figure 13.2).
* Entry continues until the demand curve decreases to D2, where it is just tangent to the firm's average cost curve. At this point, firms in the industry are earning zero economic profits, and there is no incentive for additional firms to enter the industry.
Economic Loss
* Firms will exit the market
* Demand curve shift to the right. This will lead to increased profits for the remaining firms.
II. Oligopoly
Oligopoly (market power based on product differentiation and/or the firm's dominance of the market)
* Small number of relatively large firms that are mutually interdependent
* Differentiated or standardized product
* Market entry and exit difficult
* Non-price competition very important among firms selling differentiated products
Example of oligopolistic markets: most of US industry is oligopolistic in structure. The main examples include beer (Anheuser-Busch,
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