9. Monopolistic Competitionamp; Oligopoly.ppt

9. Monopolistic Competition Oligopoly Monopolistic Competition Oligopoly Measuring market dominance 4-firm conentration ratio % sales from 4 largest firms 40% then oligopoly 40% then monopolistic comp. Herfindahl-Hirschman Index (HHI) largest 50 firms sum square of % market share used by Justice Department if monopoly = (100)2 = 10,000 HHI (cont.) if 1000 market is competitive if 1800 market is uncompetitive Oligopoly small number of firms interdependent behavior barriers to entry examples Airlines Automobiles Cereal Soft Drinks what types of barriers? economies of scale auto industry legal restrictions brand recognition cereal, soft drinks control over essential resource Firm behavior no one model of behavior set of possible behaviors Cartel firms collude to act like a single monopolist restrict output, charge higher price block entry Price leadership informal collusion dominant firm sets price other firms follow to avoid a price war steel, airline, auto industries cartels are tough to maintain each firm has output quota each firm tempted to cheat tough to block new entry Collusion and Cartels firms may collude divide market fix prices illegal in U.S. examples OPEC ADM others Monopolistic Competition large # of firms product differentiation compete w/ quality, price, marketing no one firm dominates no collusion among firms free to enter/exit examples running shoes fast food franchises clothing cleaning supplies beauty products product differentiation physical differences color, size, taste ... location convenience, drug stores services delivery image high quality vs. value Firm Behavior, short run Tommy Hilfiger Jeans demand curve downward sloping less elastic than perfect competition more elastic than a monopolist choose price output like a monopolist Long Run zero economic profit why? economic profit leads to entry economic loss leads to exit no entry/exit with zero economic profit Excess capacity firms output is not at minimum of ATC output too s