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25 - 1Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
Monopolistic Competition
and Oligopoly
Monopolistic Competition
and Oligopoly
SuperiorCheese25C H A P T E R
25 - 2Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSMonopolistic Competition:•Relatively Large Number of Sellers
•Differentiated Products•Easy Entry and Exit
25 - 3Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
CHARACTERISTICSRelatively Large Number of Sellers•Small Market Shares•No Collusion•Independent Action
25 - 4Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
Differentiated Products• Product Attributes• Service• Location• Brand Names and
Packaging• Some Control Over Price
Role of Advertising
CHARACTERISTICS
25 - 5Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MR
P1
ATCP
rice
an
d C
ost
s
Q1
EconomicProfits
Expect New Competitors
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A1
MC
25 - 6Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MR
P1
ATCP
rice
an
d C
ost
s
Q1
EconomicProfits
Expect New Competitors
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A1
New competition drives down theprice level – leading to economic
losses in the short run
MC
25 - 7Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MR
MC
P2
ATCP
rice
an
d C
ost
s
Q2
EconomicLosses
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A2
25 - 8Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MR
MC
P3 = A3
ATCP
rice
an
d C
ost
s
Q3
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
Long-Run EquilibriumNormalProfitOnly
25 - 9Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
MONOPOLISTIC COMPETITIONAND EFFICIENCY
• Not Productively Efficient
Minimum ATC
• Not Allocatively Efficient
Price MC
• Excess CapacityGraphically…
25 - 10Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MR
MC
P3 = A3
ATCP
rice
an
d C
ost
s
Q3
Quantity
Long-Run EquilibriumPrice is Not= Minimum
ATC
Price MC
MONOPOLISTIC COMPETITIONAND EFFICIENCY
25 - 11Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
MONOPOLISTIC COMPETITIONAND EFFICIENCY
Product Variety
• Benefits of Product Variety• Nonprice Competition• Advertising Role• Trial & Error Search for
Maximum Profits
25 - 12Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSOligopoly:•A Few Large Producers•Homogeneous or Differentiated Products
•Control Over Price, But Mutual Interdependence
•Entry Barriers
25 - 13Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLIES AND MERGERS
MergersMeasures of Industry Concentration
•Concentration Ratio•Localized Markets•Interindustry Competition•World Trade
•Import Competition
25 - 14Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLIES AND MERGERS
Herfindahl IndexSum of the squared percentage marketshares for all firms in the industry – Places greater weight upon the largerfirms(%s1)2 + (%s2)2 + (%s3)2 + … + (%sn)2
A greater Herfindahl Index indicates a greater concentration of market power in the industry(Pure competition is near zero)
25 - 15Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLIES AND MERGERS
Mutual InterdependenceGame-Theory ModelCollusive Tendencies
•CollusionIncentive to CheatIntroduction to Game Theory…
25 - 16Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
GreatestCombined
Profit
25 - 17Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
IndependentActions
StimulateResponse
25 - 18Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
IndependentActions
StimulateResponse
Gravitatingto the
Worst Case
25 - 19Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
CollusionInvites aDifferentSolution
25 - 20Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
pto
wn
’s P
rice
Str
ateg
yRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
But, theincentiveto cheatis very
real
CollusionInvites aDifferentSolution
25 - 21Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
No Standard Model due to...Diversity of OligopoliesComplications of Interdependence
1 - Kinked Demand Curve2 - Collusive Pricing3 - Price Leadership
THREE OLIGOPOLY MODELS
Alternative Models:
25 - 22Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D1
MR1Quantity
The firm’s demand andmarginal revenue curves
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
25 - 23Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
MR2D1
D2
MR1Quantity
The rival’s demand andmarginal revenue curves
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
25 - 24Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
MR2D1
D2
MR1Quantity
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
Rivals tend tofollow a price cut
25 - 25Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
MR2D1
D2
MR1Quantity
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
Rivals tend tofollow a price cut
or ignore aprice increase
25 - 26Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
MR2D1
D2
MR1Quantity
Effectively creatinga kinked demand curve
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
25 - 27Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
Quantity
Effectively creatinga kinked demand curve
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
25 - 28Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MRQuantity
Profit maximizationMR = MC occurs
at the kink
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
MC2
MC1
25 - 29Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
D
MRQuantity
This behavior can setoff a price war
KINKED DEMAND THEORY:NONCOLLUSIVE OLIGOPOLY
Pri
ce
MC2
MC1
25 - 30Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
If a few firms face identical or highly similar demand and costs...
Oligopoly is conducive to collusion
They will tend to seek jointprofit maximization...
CARTELS AND OTHER COLLUSION
Graphically…
25 - 31Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
Colluding Oligopolists WillSplit the Monopoly Profits
D
MC
ATC
MR
EconomicProfit
MR = MC
Pri
ce a
nd
co
sts
Q0
P0
A0
CARTELS AND OTHER COLLUSION
25 - 32Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
Overt Collusion•Cartel•OPEC
Covert Collusion•Recent Examples•Tacit Understandings
CARTELS AND OTHER COLLUSION
25 - 33Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
Obstacles to Collusion•Demand and Cost Differences
•Number of Firms•Cheating•Recession•Potential Entry•Antitrust Law
CARTELS AND OTHER COLLUSION
25 - 34Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
PRICE LEADERSHIP MODEL
Leadership Tactics•Infrequent Price Changes
•Communications•Limit Pricing
Breakdowns in Price Leadership
25 - 35Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY AND ADVERTISING
Less Easily DuplicatedAdequate ResourcesPositive Effects of
AdvertisingPotential Negative
Effects of AdvertisingBrand Development
25 - 36Copyright McGraw-Hill/Irwin, 2002
Monopolistic Competition
Characteristics
Price and Output in Monopolistic Competition
Monopolistic Competition and Efficiency
Oligopoly
Oligopolies and Mergers
Three Oligopoly Models
Kinked-Demand Theory
Cartels and Collusion
Price Leadership
Oligopoly and Efficiency
Key Terms
PreviousSlide
NextSlide
EndShow
OLIGOPOLY AND EFFICIENCY
Productive EfficiencyP = Minimum ATC
Allocative EfficiencyP = MC
Oligopoly: No Productive Efficiency
Oligopoly: No Allocative Efficiency
Qualifications