# Monopolistic Competition and Oligopoly

```Pure
Monopoly
Perfect
Competition
Monopolistic
Competition
Oligopoly
Concentration Ratios
• One measure the degree of competition in an
industry is its concentration ratio.
• An industry’s concentration ration is the
percentage market share of the top firms in the
industry.
• The concentration ratio of the “n” top firms is:
Total Sales of the top “n” Firms
CRn =
Total Industry’s Sales
100
An Example
Four-firm and eight-firm concentration ratios are
more commonly used, concentration ratios can be
calculated for any number of top firms. 20 and 50firm concentration ratios are particularly useful when
comparing industries with larger number firms.
• In the US there are 48 manufacturers of breakfast
cereal with the total sales of \$9099 million. The top 4
companies sales amount to \$7543 million. The 4firm concentration ratio for this industry is
(7543/9099).100= 82.9
(See Table 11.5, page 447&lt; in the book.)
Monopolistic Competition
• Many firms producing producing differentiated
products
• Each firm would face a downward-sloping
demand curve
• The 15-minute fame
• To maximize profit the firm set its estimated
MR equal to its MC
• The firm may enjoy a short-run profit
• In the long run due to the emergence of
substitutes the demand starts to shrink
A Monopolistically competitive Firm’s Market Share
\$
P1
P2
MS
MS`
Q
Q1
Q2
Q3
\$
p1
p2
MS1
MS2
A Monopolistically Competitive
MS3
Firm’s Demand Curve
MS4
MS5
a
c
b
d
p3
e
p4
p5
f
d
Q
0
q1 Qo
q2
q2
q3
q4
MR`
\$
MS
P
a
SMC
b
d
Q
0
Q1
Q2
MR
\$
MS
Short-Run Equilibrium: A Monopolistically
Competitive Firm
SMC
Pe
c
a
SATC
b
d`
Q
0
Qe
MR`
\$
Long-Run Equilibrium: A
Monopolistically Competitive Firm
LMC
LAC
P=LAC
Pe
d
o
qe
MR
Q
Oligopolies
• A market with a few firms each large
enough to have an effect on the price
• Interdependence among firms
• Each firm would try to guess its
competitor’s reaction to its pricing strategy
• Relative price stability
• Different Oligopoly models
• The Kinked Demand Curve Model
• The Game Theory
\$
d`
The Kinked Demand Curve
Pe
a
MC4
MC3
MC2
d
MC1
0
D
Qe
MR
Q
\$
A Duopoly with a Superior Firm
Pb
MCb
Pa
MCa
D`
o
Qb Qa
QT
MR`
D
Q
\$
Sf , MCf
MCL
Pb
e
Pe
DL
g
QL
a
Pf
h Dm
MRL
QeL
Qm
Qes
Qem
0
Market Demand and Small Firms’ Supply
```