Monopolistic Competition and Oligopoly

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chapter Eleven
monopolistic competition and oligopoly
Pure competition and pure monopoly are the exceptions, not the rule, in the U.S. economy. In this chapter, the two market structures that fall between the extremes are discussed. Monopolistic competition contains a considerable amount of competition mixed with a small dose of monopoly power. Oligopoly, in contrast, implies a blend of greater monopoly power and less competition. First, monopolistic competition is defined, listing important characteristics, typical examples, and efficiency outcomes. Next we turn to oligopoly, surveying the possible courses of price, output, and advertising behavior that oligopolistic industries might follow. Finally, oligopoly is assessed as to whether it is an efficient or inefficient market structure. This was Chapter 23 in the 17th edition.

After completing this chapter, students should be able to:
1. List the characteristics of monopolistic competition. 2. Explain how product differentiation occurs in similar products. 3. Determine the profitmaximizing price and output level for a monopolistic competitor in the short run when given cost and demand data. 4. Explain why a monopolistic competitor will realize only normal profit in the long run. 5. Identify the reasons for excess capacity in monopolistic competition. 6. Explain how product differentiation may offset these inefficiencies. 7. Describe the characteristics of an oligopolistic industry. 8. Differentiate between homogeneous and differentiated oligopolies. 9. Identify and explain the most important causes of oligopoly. 10. Describe and compare the concentration ratio and the Herfindahl index as ways to measure market dominance in an industry. 11. Use a profit-payoffs matrix (game theory) to explain the mutual interdependence of two rival firms and why oligopolists might tempt to cheat on a collusive agreement. 12. Identify three possible models of oligopolistic price-output behavior. 13. Use the kinked demand curve theory to explain why prices tend to be inflexible. 14. Explain the major advantages of collusion for oligopolistic producers. 15. List the obstacles to collusion behavior.

16. Explain price leadership as a form of tacit collusion. 17. Explain why oligopolies may prefer nonprice competition over price competition. 18. List the positive and negative effects of advertising. 19. Explain why some economists assert that oligopoly is less desirable than pure monopoly. 20. Explain the three ways that the power of oligopolists may be diminished. 21. Define and explain the terms and concepts listed at the end of the chapter. LECTURE NOTES

I.Learning objectives – In this chapter students will learn:
A. The characteristics of monopolistic competition.
B. Why monopolistic competitors earn only a normal profit in the long run.
C. The characteristics of oligopoly.
D. How game theory relates to oligopoly.
E. Why the demand curve of an oligopolist may be kinked.
F. The incentives and obstacles to collusion among oligopolists.
G. The potential positive and negative effects of advertising. II.
Review Table 11.1.
III.Monopolistic Competition: Characteristics and Occurrence A.Monopolistic competition refers to a market situation in which a relatively large number of sellers offer similar but not identical products. 1.Each firm has a small percentage of the total market.

2.Collusion is nearly impossible with so many firms.
3.Firms act independently; the actions of one firm are ignored by the other firms in the industry. B.Product differentiation and other types of nonprice competition give the individual firm some degree of monopoly power that the purely competitive firm does not possess. 1.Product differentiation may be physical (qualitative)....
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