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Introduction
In discussing real-world competition, the
focus quickly becomes market structure.
Market structure is the physical
characteristics of the market within
which firms interact.
Introduction
Market structure involves the number of
firms in the market and the barriers to
entry.
Perfect competition, with an infinite
number of firms, and monopoly, with a
single firm, are polar opposites.
Introduction
Monopolistic competition and oligopoly lie
between these two extremes.
Monopolistic competition is a market
structure in which there are many firms
selling differentiated products.
Oligopoly is a market structure in which
there are a few interdependent firms.
Introduction
Most U.S. industry structures fall almost
entirely between monopolistic competition
and oligopoly.
Perfectly competitive and monopolistic
industries are nearly nonexistent.
Classifying Industries
One of the ways in which economists
classify markets is by cross-price
elasticities.
Cross-price elasticity measures the
responsiveness of the change in demand for a
good to change in the price of a related good.
Classifying Industries
Industries are classified by government
using the North American Industry
Classification System (NAICS).
The North American Industry
Classification System (NAICS) is a
classification system of industries adopted
by Canada, Mexico, and the U.S. in 1997.
Classifying Industries
When economists talk about industry
structure the general practice is to refer
to three-digit industries.
Under the NAICS, a two-digit industry
is a broadly based industry.
A three-digit industry is a specific type
of industry within a broadly defined twodigit industry.
Concentration Ratio
The concentration ratio is the
percentage of industry output that a
specific number of the largest firms
have.
Concentration Ratio
The most commonly used concentration
ratio is the four-firm concentration ratio.
The higher the ratio, the closer to an
oligopolistic or monopolistic type of
market structure.
Monopolistic Competition
The four distinguishing characteristics of
monopolistic competition are:
Many sellers.
Differentiated products.
Multiple dimensions of competition.
Easy entry of new firms in the long run.
Many Sellers
When there are many sellers as in
monopolistic competition, they do not
take into account rivals reactions.
The existence of many sellers also makes
collusion difficult.
Monopolistically competitive firms act
independently.
Differentiated Products
The many sellers characteristic gives
monopolistic competition its competitive
aspect.
Product differentiation gives monopolistic
competition its monopolistic aspect.
Differentiated Products
Differentiation exists so long as
advertising convinces buyers that it
exists.
Firms will continue to advertise as long
as the marginal benefits of advertising
exceed its marginal costs.
Monopolistic Competition
Price
MC
ATC
PM
MR
0
QM
D
Quantity
Price
MC
ATC
D
PC
Monopolistic competition
QC
Quantity
MC
ATC
PM
PC
QM
MR
D
QC Quantity
Advertising
& the Creation of Name Brands
There is a sense of trust in buying brands we
know.
Advertising creates Name Brand Recognition.
Consumers are sometimes willing to pay more to
reduce their uncertainty about the quality of
the product.
Companies that develop name brands can often
charge more than for no name homogeneous
products.
Oligopoly
Oligopoly is a market structure where
there are a small number of mutually
interdependent firms.
Each firm must take into account the
expected reaction of other firms to its
profit maximizing output decision.
MC0
D1
MC1
d
MR1
D2
MR2
Quantity
Price Wars
Price wars are the result of strategic
pricing decisions gone wild.
Sometimes a firm engages in this activity
because it hates its competitor.
Price Wars
A firm may develop a predatory pricing
strategy as a matter of policy
A predatory pricing strategy involves
temporarily pushing the price down in order
to drive a competitor out of business.
Game Theory
and Strategic Decision Making
Most oligopolistic strategic decision
making is carried out with explicit or
implicit use of game theory.
Game theory is the application of
economic principles to interdependent
situations.
700
700
600
600
500
500
400
400
Price
575
Price
$800
300
200
100
100
1
MC
Competitive
solution
300
200
Monopolist
solution
MR
9 10 11
MC ATC
$800
800
700
700
700
600
550
500
600
550
500
600
550
500
400
300
400
Price
A
Price
Price
$800
$900
MC ATC
300
200
200
100
100
100
2 3 4
5 6 7
2 3 4
6 7
B
A
NonCheating
400 cheating
firms
firms
output
300 output
200
2 3
4 5 6
7 8
A Cheats
A +$200,000
A $75,000
B Does not
cheat
B $75,000
B $75,000
A $75,000
A0
B Cheats
B +$200,000
B0
Monopolistic Competition,
Oligopoly, and Strategic Pricing
End of Chapter 13