Transcript Oligopoly - Cornell University

Monopolistic Competition
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Market Structures - Review
 Competitive:
many firms, identical products
 Monopoly: single firm, no close substitutes
 Oligopoly: several firms, similar products,
degree of product differentiation varies
depending upon the market
 Monopolistic competition: many firms, similar
products, slightly differentiated products
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Competitive Market
 This
is the classic
“textbook” market structure.
 Firms in a competitive
market all make a product
that is perfectly
substitutable: all
demanders are equally
satisfied with any supplier’s
product. Firms are price
takers.
 Hot dogs!
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Monopoly
 The
single seller makes
a product that has no
good substitute.
 Other firms may be able
to produce the good or
service but choose not to
enter the market or are
barred from it. Firms are
price makers.
 Some pharmaceuticals
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Oligopoly
 A few
sellers make
products that are good,
but not perfect,
substitutes.
 Consumers can be
induced to change
suppliers but have only
a limited number of
choices.
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Monopolistic Competition
The market has
many firms but each
supplier’s product is
differentiated.
 Consumers can be
induced to change
brands but they
have brand
preferences.

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Question
 What
is the appropriate market structure
model for each of these products or firms:
competitive, monopoly, oligopoly,
monopolistic competition?
–
–
–
–
–
–
–
–
The Campus Store
Kinko’s
Pepperidge Farm’s Whole Wheat Bread
PowerMac computer
Windows computer
Viagra
Morton salt
AT&T long distance
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Answers

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The Campus Store: most products competitive, textbooks
oligopoly
Kinko’s: monopolistic competition (differentiated service)
Pepperidge Farm’s Whole Wheat Bread: competition or
monopolistic competition (slightly differentiated recipes)
PowerMac computer and clones: monopoly, under license.
Windows computer: monopolistic competition (differentiated
features)
Viagra: monopoly
Morton salt: competitive
AT&T long distance: oligopoly
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Monopolistic Competition
 Structure:
– Several firms in the market.
– Producing differentiated products.
– “Free” entry and exit.
– Full and symmetric information.
 1st
and 3rd smack of perfect competition.
 2nd adds a monopoly ingredient.
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On Differentiation
Could
be:
– actual: taste, color, location, service,
etc.
– perceived: L.e.i. jeans vs. Wranglers!
Advertising
often plays a big role in
monopolistically competitive markets
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An Historical Note:

Intellectual “parents”
– Joan Robinson (economist at Cambridge in
the U.K.)
– Edward Chamberlin (economist at Harvard in
Cambridge, MA)
– Both pioneered the work on monopolistic
competition in the early 1930’s.
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Monopolistic Competition Short Run Conduct


The monopolistically competitive firm looks and acts just like a minimonopolist.
Example: Gloria Vanderbilt Jeans
srmc
$
sratc
PMC
atc
d
xMC
mr
x
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Monopolistic Competition Long Run Conduct



Free entry will force
firm long run
economic profits to
zero.
So: 1) profit max;
2) zero profit; and
3) a downward
sloping firm demand
and corresponding
marginal revenue.
Firm demand will be
tangent to its long
run average total
cost curve.
$
lratc
lrmc
PMC
d
xMC
mr
x
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Why tangent?

Firms profit maximize but free entry will force
firm long run economic profits to zero.
– 1) profit max implies that mr=mc at xmc
– 2) zero profit implies that P=lratc at xmc
– 3) product differentiation implies a downward
sloping firm demand and corresponding marginal
revenue

Firm demand must be tangent to the long run
average total cost curve - which must occur to
the left of the lratc curve’s minimum point.
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Monopolistic CompetitionPerformance

Efficiency:
– Is the monopolistically competitive firm Pareto
Efficient? That is, at xMC is net social surplus
maximized? Does $MB=$MC at xMC?
» answer: No.
– Is the monopolistically competitive firm productively
efficient? Does the firm operate at minimum efficient
scale?
» answer: NO! There is “excess capacity.”

– Is this “excess capacity” bad?
– Isn’t variety really the spice of life?
Don’t forget there’s always equity to consider, too.
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