9
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Monopolistic Competition and
Oligopoly
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Monopolistic Competition
• Relatively large number of sellers
• Differentiated products
• Easy entry and exit
LO1
9-2
Price and Output in Monopolistic Competition
• Demand curve is downward•
slopping
Elasticity of demand is less than
infinity
• Factors affect elasticity of demand
LO2
9-3
The Short Run: Profit or Loss
Price and Costs
MC
ATC
P1
A1
Economic
Profit
D1
MR = MC
MR
0
Q1
Quantity
LO2
9-4
The Short Run: Profit or Loss
Price and Costs
MC
ATC
A2
P2
Loss
D2
MR = MC
MR
0
Q2
Quantity
LO2
9-5
The Long Run: Only a Normal Profit
MC
Price and Costs
ATC
P3= A3
D3
MR = MC
MR
0
Q3
Quantity
LO2
9-6
Oligopoly
• A few large firms dominate the market
• Homogeneous or differentiated
•
•
•
LO3
products
High degree of Mutual
interdependence
High barriers of entry
Price rigidity and non-price
competition
9-7
Kinked Demand Curve Model
• Assumptions:
Rivals match price reductions
Rivals ignore price increses
LO5
9-8
Kinked-Demand Curve
MC1
D2
e
MR2
P0
MC2
f
g
D1
Q0
LO5
MR1
9-9
Kinked-Demand Curve
• Criticisms
• Explains inflexibility, not price
• Prices are not that rigid
LO6
9-10
Price Leadership Model
• Assumptions:
Dominant firm initiates price
changes
Other firms follow the leader
LO6
9-11
Perfect Collusion
• Cartels: a group of firms or nations
that collude to
• formally agree to the same price
• restrict output levels for members
LO6
9-12