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Oligopoly and Monopolistic Competition

Oligopoly and Monopolistic Competition. Characteristics of a monopolistically competitive market. Many buyers and sellers Differentiated products Easy entry and exit. Relationship to other market models. Monopolistic competition is similar to perfect competition in that:

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Oligopoly and Monopolistic Competition

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  1. Oligopoly and Monopolistic Competition

  2. Characteristics of a monopolistically competitive market • Many buyers and sellers • Differentiated products • Easy entry and exit

  3. Relationship to other market models • Monopolistic competition is similar to perfect competition in that: • There are many buyers and sellers • There are no barriers to entry or exit • Monopolistic competition is similar to monopoly in that: • Each firm is the sole producer of a particular product (although there are close substitutes) • The firm faces a downward sloping demand curve for its product

  4. Demand curve facing a monopolistically competitive firm

  5. The firm’s demand curve and entry and exit • As firms enter a monopolistically competitive market, the demand facing a typical firm declines and becomes more elastic.

  6. Short-run equilibrium in a monopolistically competitive industry • Economic profits lead to entry and a reduction in the demand facing a typical firm.

  7. Long-run equilibrium in a monopolistically competitive industry • Entry continues until economic profit equals zero for a typical firm. • This equilibrium is often referred to as a “tangency equilibrium.”

  8. Product differentiation and advertising • Monopolistically competitive firms may receive short-run economic profit from successful product differentiation and advertising. • These profits are, however, expected to disappear in the long run as other firms copy successful innovations.

  9. Location decisions • Monopolistically competitive firms often locate near each other to appeal to the “median” customer in a geographical region. (e.g., fast food restaurants and car dealerships) • Film about monopolistic competition

  10. Oligopoly • a small number of firms produce most output • a standardized or differentiated product • recognized mutual interdependence • difficult entry.

  11. Strategic behavior • Strategic behavior occurs when the best outcome for one firmdepends upon the actions and reactions of other firms.

  12. A MC B AC C D MR O Q Kinked demand curve model • Other firms are assumed to match price decreases, but not price increases.

  13. Game theory examples Examines the payoffs associated with alternative choices of each participant in the “game.” • Prisoners’ dilemma (Film) • Duopoly pricing game

  14. Shared monopoly • Joint profits are higher when firms behave as a shared monopoly • Cartelarrangement is illegal in the U.S. and UE • A cartel arrangement can maximize industry profits • Each firm can increase its profits by violating the agreement • Cartel agreements have generally been unstable.

  15. Film about oligopoly

  16. Bibliography: • http://www.oswego.edu/~kane/eco101.htm • Czarny B. „Podstawy ekonomii”, PWE, 2002

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