Marketing
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CH-8FINA251.pptChapter - 8
Market Structure
Monopolistic Competition and Oligopoly
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Monopolistic Competition
It is something of a hybrid between perfect
competition and monopoly. Characteristics of a
monopolistically competitive industry include:
Many sellers
Low barriers to enter
Differentiated products
Advertising on a local level
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Monopolistic Competition
Examples of industries that are monopolistically competitive include:
Retail stores
Gas Stations
Restaurants
Car Dealers
Services (legal, financial, medical, haircuts)
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Monopolistic Competition
Short-run economic profits
are possible.
Long-run economic profits are unlikely because of unrestricted and relatively easy access entry into industry.
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Monopolistic Competition
In the short run firms maximize profits where
MC = MR in the upward sloping portion of the MC curve, as long as the price is greater than AVC.
See next slide for the short-run profit-maximizing diagram.
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Price, MR,
AR, Costs
in Dollars
Quantity
Produced
MR
$6
$7
400
D (AR)
ATC
AVC
MC
MC=MR
Monopolistic Competition
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Monopolistic Competition
In the long run, due to low barriers to enter, firms in monopolistic competition earn zero economic profits.
See next slide for the long-run profit-maximizing diagram.
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Price, MR,
AR, Costs
in Dollars
Quantity
Produced
MR
Plr
Qlr
D (AR)
ATC
AVC
MC
Long-run
equilibrium
price
Long-run
equilibrium
quantity
MC=MR
Monopolistic Competition
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Oligopoly
Characteristics of an oligopoly industry include:
A Few firms (2, 3, 4, ...) control the majority of the sales
More difficult to start up (barriers to enter)
Firms are interdependent
Firms mostly advertise on a national scale
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Oligopoly
Examples of oligopoly industries include:
Automobile
Beer
Breakfast Cereal
Soft Drinks
Oil (Wholesalers)
Steel
Airlines
Aircraft Manufacturers
Internet Search
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Oligopoly
- Oligopoly firms maximize where MC = MR, in the upward sloping part of the MC curve, as long as price exceeds AVC.
- Long-run profits are possible, because of barriers to enter the industry.
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Oligopoly
- Because of interdependence, rival firms must take each other’s actions into account.
- What will firm A do when firm B increases its price? What will firm A do when firm B decreases its price?
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Cross-Tab Label
Which do you prefer?
Coca Cola
Pepsi Cola
Indifferent
Have never had a cola
Don’t drink colas now
Don’t know
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0 / 30
Cross-Tab Label
If you were the president of Coca Cola, inc. and Pepsi lowered its price, what would you do?
Keep the price of coke the same
Raise the price of coke
Also lower the price of coke
Not sure
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0 / 30
Cross-Tab Label
If you were the president of Coca Cola, inc. and Pepsi raised its price, what would you do?
Keep the price of coke the same
Raise the price of coke
Lower the price of coke
Not sure
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0 / 30
Oligopoly
- Let’s say that when firm B increases its price, firm A does not change its price.
And let’s say that when firm B lowers its price, firm A also lowers its price.
- The demand curve for firm A will then be a kinked demand curve.
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Oligopoly
- Firm A’s demand curve D1 is more elastic, because when firm B raises its price above the current price of $8, firm A does not raise it. Firm A gains significant market share.
- Firm A’s demand curve D2 is less elastic, because when firm B lowers its price below $8, firm A lowers it as well, and sales remain relatively constant.
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Price
Quantity
$8
D1
D2
D1
D2
$10
5
$6
$4
$2
6
4
3
2
1
10
7
8
9
MR2
MR1
Oligopoly
Current
market
price
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Oligopoly and Game Theory
Game theory has become an important study in , particularly in explaining oligopoly behavior.
See an example of game theory
simulation on the next slide.
John
Nash
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Oligopoly and Game Theory
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| B sets high price | B sets low price | |
| A sets high price | A’s profit = $40 B’s profit = $40 | A’s profit = $10 B’s profit = $60 |
| A sets low price | A’s profit = $60 B’s profit = $10 | A’s profit = $15 B’s profit = $15 |
Oligopoly and Game Theory
What happens if firms start a price war?
Do firms have an incentive to collude (cooperate and charge a high price)?
P&G Olay anti-wrinkle creams
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Oligopoly and Collusion
The temptation to collude (cartel forming) is greater in oligopoly than in other industries.
There are also barriers to collusion:
High prices attract competitors from outside the cartel.
Rival firms can’t always agree on the terms.
Cheating (charging a slightly lower price) is profitable.
There may be legal consequences.
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