Chapter 7 Section 3 Monopolistic Competition and Oligopoly

Chapter 7
Section 3
Monopolistic Competition
and Oligopoly
Monopolistic Competition
A
type of market structure in which many
companies sell products that are similar
but not identical.
 But to make their product sell, they have
to change it up and be unique.
 What
products do you buy that have
similar but slightly varied competitors?
 How do they vary?
Monopolistic Competition
 Companies
hold a monopoly over their
own particular product design.
 These
firms sell goods that are similar but
not identical.
 Jeans
are an example. (names, styles,
colors, and sizes. )

Also, bagel shops, ice cream, and retail
stores.
The 4 Conditions of M.C.
1.
Many firms – low start up costs
2.
Few artificial barriers to entry – no patents
protecting the basic product identity.
3.
Little control over price – If prices raise too
high, people will buy a substitute.
4.
Differentiated products – prices can be
raised slightly because of the variations
among competitors.
Nonprice Competition
A
way to attract customers through
characteristics other than price.

Physical Characteristics
 New
size, color, shape, texture, or taste. These tend to
model a person’s personality, job, family, or income.

Location
 Goods
are separated by where they are sold. If the
item is scarce in a certain area, the price might be
higher. If sold in a boutique, the price will be higher.

Service Level
 Firms
can charge higher prices if they offer a higher
level of service. (restaurants)

Advertising, Image, Status
 Advertising
is used to point out differences.
Prices, Output, and Profit





Monopolistic competition looks similar to perfect
competition.
Prices – Slightly higher, but limited because other firms
can easily enter the market.
Output: Prices here are higher than perfect
competition, but lower than monopoly. Output falls
somewhere in the middle. Law of Demand.
Profits: The firms earn just enough to cover all of their
costs. If it makes too much profit, a rival firm will work
to steal its competition away, or a new firm will enter
the market and offer a cheap substitute.
Production Costs and Variety: There will be many firms,
each with a low output, preventing minimized costs
and efficiency; however, consumers can benefit from
having a wide variety to choose from.
Oligopoly
A
market dominated by a few large firms.
 High prices, low output.
 Examples: air travel, cars, breakfast
cereals, and household appliances.
 Barriers to Entry –



There can be barriers: technological or
patent/license prevention.
Also, the reality is that some companies can
and will destroy your small business (Coke
and Pepsi)
Creates Economies of Scale
Cooperation and Collusion - Cheating


When an oligopoly occurs, firms will act as though they
have a monopoly.
Price Leaders


Collusion - informal


Can set prices and output for entire industries as long as
other member firms go along with the leader’s policy. This
can also start a price war (undercutting prices)
An agreement among members of an oligopoly to illegally
set prices and production levels. One outcome is called
price fixing (same or similar prices)
Cartel – Stronger than Collusion, formal

An agreement by a formal organization of producers to
coordinate prices and production. Illegal in the US, but
OPEC exists internationally. These can collapse if output
levels are controlled, but most try to produce more (cheat)
and prices will eventually fall.
Chapter 7
Section 4
Regulation and
Deregulation
• What is the cartoon
implying about
standard oil?
• How is this a bad
situation for the
consumers?
Market Power
 Control
 Total
prices
market output
 Seemingly


Monopolistic Competition
Tide, Dash, Dreft, Ivory Snow, Bold, Oxydol,
Cheer, and Gain are all detergents.
ALL are owned by a single company – P&G
Government and Competition
 Antitrust
laws are in place to prevent
companies from unfairly pushing out
competition.

Trust = business that has too much market power
 U.S.
has shut down many trusts in the past including:
American Tobacco Company, Standard Oil, and
AT&T.
Overall  Markets
dominated by one or a few firms
tend to have higher prices and lower
output than markets with multiple firms.
 The
government can use regulatory laws
and deregulation to promote
competition, often resulting in more
choices, lower prices, and better products
for consumers.
Market Structure Comparison
p.170
Perfect
Monopolistic
Competition Competition
Oligopoly
Monopoly
Number of
Firms
Many
Many
A few
dominate
One
Variety of
Goods
None
Some
Some
None
Control over
prices
None
Little
Some
Complete
Barriers to
Entry
None
Low
High
Complete
Examples
Wheat,
shares of
stocks
Jeans, Books
Cars, movie
studios
Public Water