chapter10monopolisticcompetitionandoligopoly.pptVIP

Monopolistic and Oligopoly Chapter 10 Monopolistic Competition Many producers offer products that are either close substitutes but are not viewed as identical Each supplier has some power over the price it charges : price makers Low barriers to entry: firms in the long run can enter or leave the market with ease Act independently of each other Differentiate their products Exhibit 1a: Maximizing Short-Run Profit Exhibit 1b: Minimizing Short-Run Loss Zero Economic Profit in the Long Run Low barriers to entry in monopolistic competition: short-run economic profit will attract new entrants in the long run With losses some competitors will leave the industry Their customers will switch to the remaining firms, increasing the demand for each remaining firm’s demand curve and making it less elastic Exhibit 2: Long-run Equilibrium Exhibit 3: Perfect Competition versus Monopolistic Competition Comparison Firms in perfect competition are not producing at minimum average cost and are said to have excess capacity, because production falls short of the quantity that would achieve the lowest average cost. Excess capacity means that each producer could easily serve more customers and in the process would lower average cost. The marginal value of increased output would exceed its marginal cost, so greater output would increase social welfare. Comparison Some argue that monopolistic competition results in too many suppliers and in product differentiation that is often artificial Counterargument is that consumers are willing to pay a higher price for greater selection Oligopoly Market structure that is dominated by just a few firms Each must consider the effect of its own actions on competitors’ behavior ? the firms in an oligopoly are interdependent Varieties of Oligopoly Homogeneous or differentiated products Interdependence: the behavior of any particular firm is difficult to analyze Domination by a few firms can often be traced to some form of barrier to entry Exhibit