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Unit 8

Unit 8. Monopolistic Competition Oligopoly. Monopolistic Competition. This market structure exists when many sellers compete to sell a differentiated product in a market into which entry of new sellers is possible. Monopolistic Competition Criteria. Many sellers Differentiated products

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Unit 8

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  1. Unit 8 Monopolistic Competition Oligopoly

  2. Monopolistic Competition • This market structure exists when many sellers compete to sell a differentiated product in a market into which entry of new sellers is possible.

  3. Monopolistic Competition Criteria • Many sellers • Differentiated products • Firms do not consider reaction of rivals when choosing product prices • Easy entry of new firms in the LR

  4. Monopolistic Competition Short Run Profit Maximization: MR = MC MC ATC P MR Demand Q

  5. Monopolistic Competition Short Run Profit: Positive or Negative? • Depends on Price and ATC at Equilibrium Quantity. MC ATC P ATC MR Demand Q

  6. Monopolistic Competition Price is greater than ATC, so Positive SR Profit MC ATC P Positive Profit ATC MR Demand Q

  7. Monopolistic Competition Long Run Profit Maximization: MR = MC MC ATC P MR Demand Q

  8. Monopolistic Competition Long Run Profit will be driven to ZERO • Price and ATC are equal at the Equilibrium Quantity MC ATC ATC, P MR Demand Q

  9. Monopolistic Competitors Advertise to Gain Market Share • Does not produce at ATC minimum due to advertising costs • Goals of advertising: • Move Demand Curve right • Make Demand Curve more Inelastic • Brand Loyalty

  10. Monopolistic CompetitionversusPerfect Competition • Perfect Competition firm operates where P = MR = MC = ATC and the ATC is at its minimum. • Monopolistic Competition firm operates where MR = MC. P is greater than MC and ATC is not at its minimum.

  11. Monopolistic CompetitionversusPerfect Competition MC ATC MC ATC P P D, MR MR D Q Q

  12. Oligopoly • A market structure in which a few sellers dominate the sales of a product and where entry of new sellers is difficult or impossible. • Examples: Automotive, Steel, Energy

  13. Prisoner’s Dilemma Confess Not Confess Confess Not Confess

  14. Game Theory Pricing Strategy Coke = $8 Coke = $6 Pepsi = $8 Pepsi = $6

  15. Price Wars • A bout of continual price cutting by rival firms in a market. • Predatory Pricing • Temporarily pushing price below ATC to drive competitor out of business.

  16. Contestable Market • A market in which entry of sellers is easy and exit is not very costly • Keeps prices in check in a market that appears to be a monopoly • Example: Unregulated air travel market

  17. Collusion and Cartels • A Cartel is a group of firms acting together to coordinate output decisions and control prices as if they were a single monopoly. • Example: OPEC Oil Cartel

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