chapter
ten
Monopolistic Competition and
Oligopoly
Prepared by: Fernando & Yvonn Quijano
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
After studying this chapter,
you should be able to:
1
…the coffeehouse market is
monopolistically
competitive, rather than
perfectly competitive.
LEARNING OBJECTIVES
CHAPTER 10: Monopolistic Competition and
Oligopoly
Starbucks: Growth through Product Differentiation
2
3
4
5
6
Explain why a monopolistically
competitive firm has a
downward-sloping demand
curve.
Explain how a monopolistically
competitive firm decides the
quantity to produce and the
price to charge.
Analyze the situation of a
monopolistically competitive
firm in the long run.
Compare the efficiency of
monopolistic competition and
perfect competition.
Show how barriers to entry
explain the existence of
oligopolies.
Use game theory to analyze
oligopolistic firms.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
Monopolistic Competition and Oligopoly
Monopolistic competition A
market structure in which barriers to
entry are low, and many firms
compete by selling similar, but not
identical, products.
Oligopoly A market structure in
which a small number of firms
compete.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
1 LEARNING OBJECTIVE
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
The Demand Curve for a Monopolistically Competitive Firm
10 - 1
The Downward-Sloping Demand
for Caffe Lattès at a Starbucks
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping Demand Curve
10 – 1
Demand and Marginal Revenue
at a Starbucks
CAFFÈ LATTES
SOLD PER WEEK
(Q)
0
1
2
3
4
5
6
7
8
9
10
PRICE
(P)
$6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
TOTAL
REVENUE
(TR = P x Q)
AVERAGE
REVENUE
(AR – TR/Q)
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
$0.00
5.50
10.00
13.50
16.00
17.50
18.00
17.50
16.00
13.50
10.00
$5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
$5.50
4.50
3.50
2.50
1.50
0.50
-0.50
-1.50
-2.50
-3.50
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping Demand Curve
10 - 2
How a Price Cut Affects a Firm’s
Revenue
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
Demand and Marginal Revenue for a Firm in a
Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping Demand Curve
10 - 3
The Demand and Marginal Revenue
Curves for a Monopolistically
Competitive Firm
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
2 LEARNING OBJECTIVE
How a Monopolistically Competitive Firm
Maximizes Profits in the Short Run
10 - 4
Maximizing Profit in a
Monopolistically Competitive
Market
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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3 LEARNING OBJECTIVE
CHAPTER 10: Monopolistic Competition and
Oligopoly
What Happens to Profits in the Long Run?
How Does Entry of New Firms Affect the Profits of Existing Firms?
10 - 5
How Entry of New Firms Eliminates Profits
Don’t Confuse Zero Economic Profit with Zero Accounting Profit
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien
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CHAPTER 10: Monopolistic Competition and
Oligopoly
What Happens to Profits in the Long Run?
Is Zero Economic Profit Inevitable in the Long Run?
A firm’s profits will be eliminated in the
long run only if the firm stands still and
fails to find new ways of differentiating
its product or fails to find new ways of
lowering the cost of producing its
product.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 10 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
4 LEARNING OBJECTIVE
Comparing Perfect Competition
and Monopolistic Competition
10 - 6
Comparing Long-Run
Equilibrium under Perfect
Competition and
Monopolistic Competition
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 11 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
Comparing Perfect Competition
and Monopolistic Competition
Excess Capacity under Monopolistic Competition
The profit-maximizing level of output for a
monopolistically competitive firm comes at a level
of output where price is greater than marginal
cost and the firm is not at the minimum point of
its average total cost curve.
How Consumers Benefit from Monopolistic
Competition
Consumers benefit from being able to purchase
a product that is differentiated and more closely
suited to their tastes.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 12 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
Oligopoly and Barriers to Entry
Barriers to Entry
10-7
Economies of Scale Help
Determine the Extent of
Competition in an Industry
Economies of scale Economies of
scale exist when a firm’s long-run
average costs fall as it increases
output.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 13 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
Oligopoly and Barriers to Entry
Barriers to Entry
In addition to economies of scale,
other barriers to entry include:
• Ownership of a key input
• Government–Imposed Barriers
• Patent The exclusive right to a product
for a period of 20 years from the date the
product was invented.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 14 of 30
6 LEARNING OBJECTIVE
CHAPTER 10: Monopolistic Competition and
Oligopoly
Using Game Theory to Analyze Oligopoly
Game theory The study of how people make decisions in
situations where attaining their goals depends on their
interactions with others; in economics, the study of the
decisions of firms in industries where the profits of
each firm depend on its interactions with other firms.
Key characteristics of all games:
1. Rules that determine what actions are allowable.
2. Strategies that players employ to attain their
objectives in the game.
3. Payoffs that are the results of the interaction among
the players’ strategies.
Business strategy Actions taken by a business firm to
achieve a goal, such as maximizing profits.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 15 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
13 - 1
A Beautiful Mind: Game Theory
Goes to the Movies
In the film, A Beautiful Mind, Russell
Crowe played John Nash, winner of
the Nobel Prize in Economics.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 16 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
Using Game Theory to Analyze Oligopoly
Firm Behavior and the Prisoners’ Dilemma
Cooperative equilibrium An
equilibrium in a game in which
players cooperate to increase their
mutual payoff.
Noncooperative equilibrium
An equilibrium in a game in which
players do not cooperate but pursue
their own self-interest.
Prisoners’ dilemma A game
where pursuing dominant strategies
results in noncooperation that leaves
everyone worse off.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 17 of 30
CHAPTER 10: Monopolistic Competition and
Oligopoly
Using Game Theory to Analyze Oligopoly
Cartels: The Case of OPEC
10-10
World Oil Prices
Cartel A group of firms that
colludes by agreeing to restrict
output to increase prices and
profits.
Sustaining high prices has been difficult because
members often exceed their output quotas.
© 2007 Prentice Hall Business Publishing Essentials of Economics R. Glenn Hubbard, Anthony Patrick O’Brien 18 of 30
CHAPTER 10: Monopolistic Competition
and Oligopoly
Barrier to entry
Business strategy
Cartel
Collusion
Cooperative equilibrium
Dominant strategy
Economies of scale
Game theory
Monopolistic competition
Nash equilibrium
Noncooperative equilibrium
Oligopoly
Patent
Payoff matrix
Prisoners’ dilemma
© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien 19 of 30