Chapter 13

Oligopoly and Monopolistic Competition

Key issues

1. market structure

2.game theory

3.cooperative oligopoly models (cartels)

4.Cournot model of noncooperative oligopoly

5. Stackelberg model of noncooperative oligopoly

6.monopolistic competition

7.Bertrand model of noncooperative oligopoly

Market structures

markets differ according to

• number of firms in market

• ease of entry and exit

• ability of firms to differentiate their products

Oligopoly

• small group of firms in a market with substantial barriers to entry

• because relatively few firms compete in such a market, • each firm faces a downward-sloping demand curve• each firm can set its price: p > MC• market failure: inefficient (too little) consumption• each affects rival firms

• typical oligopolists differentiate their products

Monopolistic competition

• small or moderate number of firms

• free entry = 0• p = AC

• usually products differentiated

Strategies and games

• oligopolistic or monopolistically competitive firm use a • strategy:• battle plan of actions (such as setting a price or

quantity) it will take to compete with other firms

• oligopolies engage in a • game:• any competition between players (such as firms) in

which strategic behavior plays a major role

Game theory

• set of tools used by economists, political scientists, military analysts, and others to analyze decision making by players (such as firms) who use strategies

• these analytic tools can be used to analyze • oligopolistic games• poker• coin-matching games• tic-tac-toe• elections• nuclear war

Firm's objective

• obtain largest possible profit (or payoff) at game’s end

• typically, one firm's gain comes at expense of other firms

• each firm's profit depends on actions taken by all firms

Nash equilibrium

• set of strategies is a Nash equilibrium if, • holding strategies of all other players (firms) constant, • no player (firm) can obtain a higher payoff (profit) by

choosing a different strategy

• in a Nash equilibrium, no firm wants to change its strategy because each firm is using its • best response:• strategy that maximizes its profit given its beliefs about

its rivals' strategies

Duopoly

• consider single-period, duopoly, quantity-setting game

• duopoly: an oligopoly with two ("duo") firms

Airlines Example

• American Airlines and United Airlines

• compete for customers on flights between Chicago and Los Angeles

Notation

• Q = total number of passengers flown by both firms; sum of:

• qA = passengers on American Airlines

• qU = passengers on United Airlines

Firms act simultaneously

• each firm selects a strategy that• maximizes its profit • given what it believes other firm will do

• firms are playing • a noncooperative game of imperfect

information:• each firm must choose an action before

observing rivals’ simultaneous actions

Dominant strategy

• a strategy that strictly dominates all other strategies regardless of which actions rivals’ chose

• in this Table 13.2 game, each firm has a dominant strategy

• firm chooses its dominant strategy• where a firm has a dominant strategy, its

belief about its rival's behavior is irrelevant

Noncooperative game

• firms do not cooperate in a single-period game

• In Nash equilibrium (qA = qU = 64), each firm earns $4.1 million (< $4.6 million it would make if firms restricted their outputs to qA = qU = 48)

• sum of firms' profits is not maximized in this simultaneous choice, one-period game

Why don't firms cooperate?

• don't cooperate due to a lack of trust:

• each firm can profitably use low-output strategy only if it trusts other firm!

• each firm has a substantial profit incentive to cheat on a collusive agreement

Prisoners' dilemma game

all players have dominant strategies that lead to a profit (or other payoff) that is inferior to what they could achieve if they cooperated and played alternative strategies

Collusion in repeated games

• in a single-period prisoners' dilemma game, firms produce more than they would if they colluded

• why, then, are cartels frequently observed?• collusion is more likely in a multiperiod

game: single-period game played repeatedly• punishment: not possible in a single-period

game but possible in a multiperiod game

Supergame

• if a single-period game is played repeatedly, firms engage in a• supergame: • players’ strategies in this period may depend on rivals'

actions in previous periods

• in a repeated game, firm can influence its rival's behavior by• signaling• threatening to punish

Threat

• suppose American announces to United that it will use the following two-part strategy:• American produces smaller quantity each

period as long as United does the same• if United produces larger quantity in period t,

then American will produce larger quantity in period t + 1and all subsequent periods

• thus, if firms play same game indefinitely, they should find it easier to collude

Know number of periods

• suppose firms know that they are going to play game for T periods

• period T is like a single-period game, and all firms cheat

• hence T-1 period is last interesting period • by same reasoning, they cheat in that period, etc.• cheating is less likely to occur if end period is

unknown or there is no end

Insurance price wars

• from 1984-1995, life insurance companies' prices were high and unchanging

• in 1995, prices dropped 25% or more

Explanations for price war

1. insurers knew that new “Triple X” regulations were expected to go into effect in 1996• regulations required insurers to raise reserves on term

policies to cover future claims• were expected to boost rates on new policies by as

much as 50%• companies cut rates to attract new customers before

higher rates took effect

2. formal or informal agreement to keep prices high fell apart as end of original game approached

Cooperative oligopoly models

Adam Smith:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices"

Cartels fail

luckily for consumers, cartels often fail because

• each firm in a cartel has an incentive to cheat on the cartel agreement by producing extra output

• governments forbid them

Historic cartels

in late nineteenth century, cartels (trusts) were legal and common in the United States• oil• railroads• sugar• tobacco• steel

J.D. Rockefeller

Laws against cartels

• in response to trusts' high prices, Congress passed • Sherman Antitrust Act in 1890• Federal Trade Commission Act of 1914

• these laws prohibit firms from explicitly agreeing to take actions that reduce competition, such as jointly setting price

• these anti-cartel laws are called • antitrust laws in U.S.• competition policies in most other countries

Europe

• over the last dozen years, the European Commission has been pursuing competition cases under laws that are similar to U.S. antitrust laws

• recently the EC, the DOJ, and the FTC have become increasingly aggressive, prosecuting many more cases

• following the U.S., which uses both civil and criminal penalties, the British government introduced legislation in 2002 to criminalize certain cartel-related conduct

• EU uses only civil penalties, but its fines have increased dramatically, as have U.S. fines

Corporate Leniency Program

• in 1993, DOJ introduced a new Corporate Leniency Program that guarantees that participants in cartels who blow the whistle will receive immunity from federal prosecution

• as a consequence, DOJ has caught, prosecuted, and fined several gigantic cartels (e.g. Vitamins)

• on Valentine’s Day, 2002, EC adopted a similar policy

Sotheby’s and Christie’s

• Sotheby’s (established in 1744) and Christie’s (1776) are the two largest and most prestigious auction houses in the world

• they control 90% of the $4 billion worldwide auction market

• for most of the last two and a half centuries, they thrived

• starting at least by 1993, when faced with poor business conditions, they started to collude, according to the U.S. Department of Justice (DOJ)

Auctions (cont.)

• DOJ started investigating in 1997, but gained the necessary evidence in 2000, when Christie’s approached both DOJ and European Commission with proof that it had conspired with Sotheby’s to fix prices

• Christie’s applied for leniency under the U.S. antitrust laws, effectively “shopping” its rival

Auctions (cont.)

• DOJ charged that the pair • held meetings between top-level executives• exchanged confidential lists of super-rich clients• agreed to limit which customers received lower

commissions• charged identical commission rates (a sliding scale up

to 20%) to other sellers who had little negotiation power

• Sotheby’s paid a $45 million fine• the two auction houses agreed to pay more than

$512 million to former clients to settle lawsuits

Auctions (cont.)

• A. Alfred Taubman, Sotheby’s former chairman and who still held a 21% share of stock and controlled 63% of its voting rights, was sentenced for price fixing to a year in prison and fined $7.5 million in 2002

• Christie’s former chairman, Sir Anthony Tennant, lives in England has refused to come to the United States to face trial

• however, days before Taubman’s conviction, the European Commission brought charges against both auction houses

Why some cartels persist

1. tacit collusion

2. international cartels (OPEC) and cartels within certain countries operate legally

3. illegal cartel believes it can avoid detection or punishment will be small

Why cartels form

members of cartel believe they can raise their profits by coordinating their actions

Why can cartels raise profits?

• if a competitive firm is maximizing its profit, why should joining a cartel increase its profit?• competitive firm is already choosing output to

maximize its profit• however, it ignores effect that changing its

output level has on other firms' profits

• cartel takes into account how changes in one firm's output affect cartel profits

Why cartels fail

• cartels fail if noncartel members can supply consumers with large quantities of goods (example: copper)

• each member of a cartel has an incentive to cheat on cartel agreement

Figure 13.1 Competition Versus Cartel

Price, p,$ per unit

(a) Firm

qc q*qmQuantity, q, Units

per year

S

MR

Market demand

AC

MC

pm

MCm

pc

pm

em

ec

MCm

pc

Price, p,$ per unit

(b) Market

Qm Qc

Quantity, Q, Unitsper year

Solved problem

• initially, all identical firms in a market collude

• if some of these firms leave the cartel and act like price takers, how are consumers affected?

Maintaining cartels

to maintain cartel, firms must

• detect cheating

• punish violators

• keep its illegal behavior hidden from governments

Detection and enforcement

• inspect each other's books (e.g., most-favored nation clauses)

• governments report bids on government contracts• divide market by region or by customers

mercury cartel (1928-1972) allocated U.S. to Spain and Europe to Italy

• use industry organizations to detect cheating • offer "low price" guarantees

Insurance price wars

• life insurance companies' prices are normally stable and high

• however, in 1995, companies dropped their prices substantially: 25% or more

• the previous price war 1981-3, when term insurance rates went from $4 to $1 per thousand dollars of coverage for a 35-year-old for a 10-year plan

Cause of price war

• theory 1: sparked by new insurance regulations • insurers knew in advance when these new regulations

(Triple X) were expected to go into effect• new regulations required insurers raise reserves on term

policies to cover future claims; were expected to boost rates by as much as 50%

• companies were cutting rates to attract new customers before the higher rates took effect

Alternative theory

theory 2 (not necessarily incompatible view): a formal or informal agreement to keep prices high fell apart as the end of the original game approached

Government created cartels

• American, European, and other governments established a cartel in 1944 that fixed prices for international airline flights and prevented competition

• baseball teams exempted from some U.S. antitrust laws since 1922 Bud Selig, baseball's commissioner: “[The baseball] antitrust exemption is protection for the

fans.”

• automobiles

Automobile cartel

• Reagan admin. negotiated 1981 voluntary export restraints (VER): Japanese auto manufacturers would reduce their auto exports to U.S.

• Why would Japanese manufacturers “voluntarily” reduce their exports? • to avoid government quotas • to act like a cartel: reducing sales to collusive level

• when U.S. allowed VER agreements to lapse in 1985, Japanese government wanted to continue to restrict exports

Auto cartel effects

• stock market value of Japanese auto industry increased during VER period by $6.6 billion

• VERs raised price of American cars by 5.4% between 1981 and 1983

• U.S. consumers lost $6.9 billion ($1984) due to these export restrictions

• using VER is foolish • foreign and domestic auto manufacturers capture

“cartel” profits from higher prices• tariffs better for U.S.

Entry and cartel success

• barriers to entry help cartel: limit competition • cartels with large number of firms rare (except

professional associations)• Dept. of Justice price-fixing cases 1963-1972

• only 6.5% involved 50 or more conspirators• average number of firms was 7.25• 48% involved 6 or fewer firms

• cartels often fall apart after entry (mercury)

Bail bonds

• Connecticut sets a maximum fee bail-bond businesses can charge for posting a given-size bond

• how close price in a city is to legal maximum depends on number of firms

Town

# of active firms

% of maximum allowed fee

Plainville, Stamford, Wallingford

1 99

Meriden, New London 2 98

Norwalk 3 54

New Haven 8 64

Bridgeport 10 78

Mergers

• if antitrust or competition laws prevent firms from colluding, they may try to merge

• U.S. laws restrict ability of firms to merge if effect would be anticompetitive

Some mergers raise efficiency

• efficiency due to greater scale

• sharing trade secrets

• closing duplicative retail outlets Chase and Chemical banks merged in 1995:

closed or combined 7 branches in Manhattan located within 2 blocks of another branch

Airline mergers

• government did not contest most airline mergers 1985-1988

• prices increased on routes served by firms that merged relative to those on routes without mergers

Soft drinks 1986 merger proposals

• Coke, largest producer of carbonated soft drinks (38.6% of sales), tried to buy third largest, Dr Pepper (7.1%)

• Pepsi, second largest producer (27.4%), tried to acquire fourth largest firm, Seven-Up Co. (6.3%)

• had these proposed mergers taken place, Coke's market share would have risen to 45.7% and Pepsi's to 33.7%

• combined share would have risen from 66.0% to 79.4%

FTC intervenes

Federal Trade Commission (FTC) opposed mergers, arguing that merger

• would increase market shares of big firms• make entry of new firms more difficult• raise costs of other companies doing

business in this market• ease "collusion among participants in the

relevant markets"

Relevant market definition

• Coca-Cola: all beverages including tap water

• Federal Judge Gesell: carbonated soft drinks (based on cross-elasticities of demand)

Outcome

• after Coke and Pepsi mergers blocked by FTC in 1986• Dr Pepper Co. sold for $416 million to investor group

($54 million less than Coke offered) • Seven-Up Co. sold for $240 million to another

investment group ($140 million less than Pepsico's bid)

• lower values to others than to Coke and Pepsi is consistent with FTC's view that Coke and Pepsi would have gained market power through these mergers

Eventually

• Dr Pepper and Seven-Up merged• by 1995: Dr Pepper/Seven-Up: 11.5% of carbonated

beverages market • Cadbury: 5.5% [Schweppes, Canada Dry, Crush,

Sunkist, and A&W (root beer) brands] • Cadbury bought Dr Pepper/Seven-Up (17% of soft-

drink market, and half non-cola part)• Coke: 41%, Pepsi: 32%

• mergers increased share of top 3 firms • FTC's actions limited share of top 2 firms

Noncooperative oligopoly

• many models of noncooperative oligopoly behavior

• firms choose quantities• Cournot model• Stackelberg model

• firms set prices: Bertrand model

Cournot

• Augustin Cournot introduced first formal model of oligopoly in 1838

• oligopoly firms choose how much to produce at same time

• as in prisoners' dilemma game, firms are playing noncooperative game of imperfect information• each firm chooses its output level before knowing what

other firm will choose• firms may choose any output level they want

Basic model

• duopoly: 2 firms (no other firms can enter)

• firms sell identical products

• market that lasts only 1 period (product or service cannot be stored and sold later)

Cournot model of airline market

• duopoly: United Airlines (UA) and American Airlines (AA) fly passengers between Chicago and Los Angeles

• no possible entry (limited landing rights at both airports)

Cournot equilibrium

• Nash equilibrium where firms choose quantities

• set of quantities sold by firms such that, holding quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity

Figure 13.2a American Airlines’ Profit-Maximizing Output

p, $ perpassenger

MC

MR D

(a) Monopoly

qA , Thousand American Airlinespassengers per quarter

339

147

243

0 339169.596

Figure 13.2b American Airlines’ Profit-Maximizing Output

MRr Dr D

p, $ perpassenger

MC

(b) Duopoly

qA, Thousand American Airlinespassengers per quarter

qU = 64

339

147

275

211

0 339275137.564 128

Figure 13.3 American and United’s Best-Response Curves

qU, Thousand Unitedpassengers per quarter

United ’s best-response curve

Cournot equilibrium

American’s best-response curve

qA, Thousand Americanpassengers per quarter

192

64

48

96

0 1929664

Figure 13.4a Duopoly Equilibria

Price-taking equilibrium

qU, Thousand United passengers per quarter

United’s best-response curve

Cournot equilibrium

Cartelequilibrium

Stackelberg equilibrium

Contractcurve

American’s best-response curve

(a) Equilibrium Quantities

qA , Thousand American passengers per quarter

192

64

48

96

0 192966448

Figure 13.4b Duopoly Equilibria

U, $ million profitof United Airlines

Cournot profits

Price-taking profits

Profit possibility frontier

Cartel profits

Stackelbergprofits

American monopolyprofit

(b) Equilibrium Profits

A, $ million profit of American Airlines

9.2

4.1

2.3

4.6

0 9.24.64.1

Algebraic approach

• estimate of linear market demand function is

Q(p) = 339 – p• linear residual demand facing AA is

qA = Q(p) – qU = (339 – p) – qU

p = 339 - qA - qU

• slope of residual demand curve is p/qA = -1, so slope of MRr = -2

MRr = 339 - 2qA - qU

Calculus

• linear residual demand facing AA is

p = 339 - qA – qU

• so AA’s revenue is

R = 339qA - qA2 - qUqA

• so AA’s marginal revenue (using the Cournot assumption) is

MRr = dR/dqA = 339 – 2qA - qU

AA Maximizes profit

MRr = 339 - 2qA - qU = 147 = MC

best-response function

qA = 96 - ½ qU

Cournot equilibrium

• intersection of best-response functions

qA = 96 - ½ qU

qU = 96 - ½ qA

• solve by substituting

qA = 96 - ½(96 - ½ qA)

qA = 64

Q = qA + qU = 128

p = 339 – Q = $211

Solved problem

• Math version of Solved Problem 13.1 in text.• Government charges American Airlines and

United Airlines a specific tax of per passenger on the Los Angeles-Chicago route.

• What is the new equilibrium number of passengers that each airline flies?

• What's the equilibrium number if the tax is $30?

Answer

• determine how the firms' best-response functions change due to the tax:

• AA sets its MRr equal to its MC (including the tax)

MRr = 339 - 2qA - qU = 147 + = MC• rearranging, AA’s best-response function is

qA = 96 - /2 - qU/2 • similarly, UA's best-response function is

qU = 96 - /2 - qA/2

Answer (cont.)

• solve for the equilibrium quantities in terms of :

• substitute UA's best-response function into AA's and rearrange:

qA = (2/3)(96 – /2) = 64 – /3• substitute for qa in UA's best-response

function:

qU = 64 – /3

Answer (cont.)

solve for the equilibrium quantities where = $30:

qA = qU = 64 – [1/3] = 54

European cigarette tax incidence

• As with a monopoly, an oligopoly may pass through less or more than 100% of a tax to consumers

• Delipalla and O’Donnell’s (2001) estimate degree of pass-through to consumers from a specific tax on cigarettes:

• less than 100% in the Netherlands (67%), Belgium (79%), and Germany (82%)

• about 100% in Denmark, the United Kingdom, Portugal, and Ireland

• extremely high in Italy (359%), France (604%), and Luxembourg (700%)

Cournot equilibrium varies with number of firms

• typical Cournot firm maximizes its profit

MR = p(1 + 1/[n]) = MC• n is elasticity of residual demand curve facing

each firm is market elasticity of demand• n is number of firms

• Lerner index: 1p MC

p n

Air ticket prices and rivalry

• markup of price over marginal cost is much greater on routes in which one airline carries most of the passengers than on other routes

• a single firm is the only carrier or the dominate carrier on 58% of all U.S. domestic routes• monopoly serves 18% of all routes• duopolies 19%• three firms 16%• four firms 13%• five or more firms 35%

Air ticket prices (cont.)

• although nearly two-thirds of all routes have three or more carriers, one or two firms dominate virtually all routes• dominant firm: has at least 60% of ticket sales by value

but is not a monopoly• dominant pair if they collectively have at least 60% of

the market but neither firm is a dominant firm and three or more firms fly this route

• all but 0.1% of routes have a monopoly (18%), a dominant firm (40%), or a dominant pair (42%)

Air ticket prices (cont.)

• (average price includes “free” frequent flier tickets and other below-cost tickets)

• ticket price is • 2.1 x MC on average across all U.S. routes and market

structures• 3.3 x MC for monopolies• 3.1 x MC for dominant firms• 1.2 x MC for dominant pairs

• if there is a dominant pair, whether there are 4 or 5 firms, price is between 1.3 x MC for a 4-firm route and 1.4 x for a route with 5 or more firms

Stackelberg model

• Cournot model: both firms make their output decisions simultaneously

• Heinrich von Stackelberg's model: firms act sequentially• leader firm sets its output first• then its rival (follower) sets its output

Figure 13.5 Stackelberg Game Tree

American

64

96

48(4.6, 4.6)

(3.8, 5.1)

(2.3, 4.6)

48

Leader’s decision Follower’s decision Profits (A, U)

64

96

48(5.1, 3.8)

(4.1, 4.1)

(2.0, 3.1)

64

64

96

48(4.6, 2.3)

(3.1, 2.0)

(0, 0)

96

United

United

United

Figure 13.6 Stackelberg Equilibrium

qU, Thousand Unitedpassengers per quarter

qA, Thousand American passengers per quarter

qU = 48

96

0 qA = 96

MR r

D r

D

MC

p, $ perpassenger

(a) Residual Demand American Faces

qA, Thousand American passengers per quarter

qU = 48

339

195

243

147

0 339192

192

qA = 96 Q = 144

United’s best-response curve

(b) United ’s Best-Response Curve

Question

• when firms move simultaneously,

• why doesn't AA announce it will produce Stackelberg-leader output,

• so as to induce UA to produce the Stackelberg follower's output level?

Answer

when firms move simultaneously, UA doesn't view AA's warning that it will produce a large quantity as a credible threat:

• not in AA’s best interest to produce large quantity• because AA cannot be sure that UA believes threat

and reduce its output, AA produces Cournot level• when one firm moves first, its threat to produce

large quantity is credible because it has already committed to producing large quantity

Monopolistic competition

• market structure in which firms• have market power• are price setters

• firms enter if there is a profit opportunity ( = 0)• monopolistically competitive equilibrium:

MR = MCp = AC

(demand curve tangent to AC curve)

Figure 13.8 Monopolistically Competitive Equilibrium

p, $ per unit

q, Units per yearq

p

MRr Dr

MC AC

p = AC

MRr = MC

Figure 13.9a Monopolistic Competition Among Airlines

p, $ perpassenger

275137.5640q, Thousand passengers

per quarter

300

275

211183

147

(a) Two Firms in the Market

ACMC

MRr for 2 firms

= $1.8 million

Dr for 2 firms

if F = $2.3 million

Figure 13.9b Monopolistic Competition Among Airlines

p, $ perpassenger

243121.5480q, Thousand passengers

per quarter

300

243

195

147

(b) Three Firms in the Market

ACMC

MRr for 3 firms

D for 3 firmsr

Number of firms

• number of firms in equilibrium is smaller, • greater economies of scale• less market demand at each price

• fewer monopolistically competitive firms,• less elastic is each firm’s residual demand

curve at equilibrium• higher fixed cost

Fixed cost and number of firms

• fixed costs determine number of firmsAC = 147 + F/q

• smallest quantity at which AC curve reaches its minimum called • full capacity, or • minimum efficient scale

• monopolistically competitive equilibrium in downward-sloping section of AC curve, so monopolistically competitive firm operates at less than full capacity in LR

Bertrand

• firms set price instead of quantity

• changes equilibrium

• (unlike monopoly, choice of quantity vs. price matters)

Figure 13.10 Bertrand Equilibrium with Identical Products

p2, Price of Firm 2,$ per unit

Firm 2 ’s best-response curve

Firm 1’s best-response curve

45° line

e

p1, Price of Firm 1, $ per unit

10

5

0 5 109.99

Figure 13.11 Bertrand Equilibrium with Differentiated Products

pc, Price of Coke,$ per unit

Pepsi ’s best-responsecurve ( MCp = $5) Coke ’s best-response

curve ( MCc = $14.50)

Coke’s best-responsecurve ( MCc = $5)

pp, Price of Pepsi, $ per unit

25

18

13

0 2513 14

e1

e2

1. Market structure

• prices, profits, and quantities in a market equilibrium depend on the market's structure

• all firms maximize profit by setting MR = MC• oligopolies and monopolistically competitive

firms are price setters: face downward-sloping demand curves

• oligopoly: entry blocked• monopolistic competition: free entry

2. Game theory

• set of tools used to analyze conflict and cooperation between firms

• each firm forms a strategy or battle plan of the actions to compete with other firms

• firms' set of strategies is a Nash equilibrium if,• holding the strategies of all other firms constant,• no firm can obtain a higher profit by choosing a

different strategy

3. Cooperative oligopoly models

• with collusion, firms collectively produce monopoly output and earn monopoly profit

• each individual firm has an incentive to cheat on a cartel arrangement so as to raise its own profit even higher

4. Cournot model of noncooperative oligopoly

• if oligopoly firms act independently, market output and firms' profits lie between competitive and monopoly levels

• Cournot model: each oligopoly firm sets its output simultaneously

• Cournot (Nash) equilibrium: each firm produces its best-response output given rivals’ outputs

• as number of Cournot firms increases, Cournot equilibrium price, quantity, and profits approach price-taking levels

5. Stackelberg model of noncooperative oligopoly

• Stackelberg leader chooses its output first

• then its rivals - Stackelberg followers – choose outputs

• leader produces more and earns a higher profit than followers

6. Monopolistic competition

• monopolistically competitive firms are price setters: MR= MC, so p > MC

• there's free entry: p = AC