Chapter 7 –Market Structures
Section 3 -Monopolistic Competition and Oligopoly
Objectives:
 Describe characteristics and give examples of monopolistic competition.
 Explain how firms compete without lowering prices.
 Understand how firms in a monopolistically competitive market set output.
 Describe characteristics and give examples of oligopoly.
PA Standard:
PA6.2.12.B
PA6.2.12.F
Evaluate the operation of non competitive markets
Identify & Analyze forces that change prices
Monopolistic Competition: a market structure in which many companies sell products
that are similar but not identical.
Four Conditions of Monopolistic competition:
1.
2.
3.
4.
Number of Firms: Many
Variety of Goods: Some, Differentiated products
Barriers to Entry: Low, Few artificial barriers
Control Over Prices: Little, Slight control over price
Non Price Competition:
1.
2.
3.
4.
Physical characteristics:
Location:
Service Level:
Advertising, image or status:
Prices: Under monopolistic competition prices will be higher than in perfect
competition, because firms have some power to raise prices.
Monopolistically competitive firms face more elastic demand curves than true
monopolies do.
Output:
Profit: Monopolistically competitive firms will earn enough to cover all costs and
still make a profit. If they make profits that are well above its costs, two market
trends would work to take profits away.
 Competition would encourage rivals to think of new ways to
differentiate their products and lure customers back.
 New firms will enter the market with slightly different products
that cost a lot less than the market leaders.
Oligopoly: A market structure dominated by a few large firms
Characteristics:
1. Number of Firms: Two to Four firms dominate
2. Variety of Goods: Some variety in goods
3. Barriers to entry: High barriers to entry
4. Control over prices: Some control over the prices
Problems with Oligopolies:
1. Price wars: Price cuts that lower the market price to below the cost of
production.
2. Collusion: Agreement among firms to divide the market, set prices, or limit
production.
3. Price fixing: An agreement among firms to charge one price for the same good.
4. Cartels: A formal organization of producers that agree to coordinate prices and
production.