Monopolistic Competition
& Oligopoly
Principles of Microeconomics
Boris Nikolaev
Monopolistic Competition
• This model was developed independently in the 1930’s by
Edward Chamberlin and Joan Robinson.
1.
Many sellers
2.
Each seller has a small market share
3.
Product differentiation  some market power  some control over
price
4.
Free or almost free entry
5.
Non-price competition (advertising)
Examples
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Banks (?)
Sporting Goods
Radio Stations (?)
Fish and Seafood
Clothing
Jewelry
Computers
Fast Foods [mac ad]
Apparel Stores
Canned Goods
Convenience Stores
Short-Run (profit)
Short-run (loss)
Notice that as before when ATC > p the firm is making a loss.
Long Run
Efficiency
• Robinson vs Chamberlin
• Are chain stores good?
Product Differentiation
The firm controls (1) price (2) product quality (3) advertisement.
1. Quality [advertisement vs reality] [Mc Donald’s reply]
2. Location / hours of availability
3. Brand names and packaging [Nike] [reebok][reebok 2][Asics]
Non-Price Competition
• Advertising creates intangible (perceived) value.
[watch here] [ads]
Brand Names
Top 10 Brands [see here] mentioned on Twitter [see here]
What top brands spend on advertisement
• Microsoft – more than 20 percent of their annual revenue or $11.5 billion
• Coca-Cola – more than $2.5 billion
• Yahoo – more than 20 percent of their annual revenue or $1.3 billion
• eBay – 14 percent to 15 percent of its revenue – which was $871 million, much of
that to advertise on Google
• Google – In the millions rather than billions of dollars – with $188 million
• Starbucks – $95 million
Big Pharma Spends More On Advertising Than Research And Development, Study
Finds [source]
Is advertising good or bad?
• Galbraith vs Hayek
Oligopoly
Characteristics (e.g. TV – Comcast, Viacom, Time Warner, Disney, Fox)
1. A few large sellers (in the case of two  duopoly)
2. Homogeneous (e.g. bananas)
or differentiated product (e.g. coffee)
3. Market power
4. Mutual interdependence
5. Barriers to entry
Examples
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Airlines
Auto Industry
Steel/ Cement
Tobacco
Soft Drinks
Beer
Movie
TV (Media)
Book Publishing
Coffee/ Bananas
Cell Phones
Air Defense
Banking
Cereal
Oil
Duopoly
The Prisoner’s dilemma
Cartels
Examples
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OPEC
DeBeers
Caviar
NCAA
[milk]
[gas]
Problems
Pseudo-variety
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Technique oligopolies use to capture bigger share of the market.
The way it works: flood the shelves with similar (quality) products
but trivially differentiated.
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It gives the illusion of variety; yet, it makes real competition harder
as new companies now compete with more products as theirs is
less noticeable on the shelf. [Bud Ad] [ Bud Ad 2]
Is small beautiful…
• Or is bigger better?