25_Econ8e_PPT_Ch25

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Monopolistic competition and oligopoly : 

Monopolistic competition and oligopoly Chapter 25 Economics, 8th Edition Boyes/Melvin

What is Monopolistic Competition? : 

What is Monopolistic Competition? Monopolistic competition is a market structure in which: There are a large number of firms The products produced by the different firms are differentiated Entry and exit occur easily Product differentiation implies that the products are different enough that the producing firms exercise a “mini-monopoly” over their product. The firms compete more on product differentiation than on price. Entering firms produce close substitutes, not an identical or standardized product. 2 Copyright © Cengage Learning. All rights reserved.

A Monopolistically Competitive Firm: Above Normal Profit : 

A Monopolistically Competitive Firm: Above Normal Profit 3 Copyright © Cengage Learning. All rights reserved.

A Monopolistically Competitive Firm: Normal Profit : 

A Monopolistically Competitive Firm: Normal Profit 4 Copyright © Cengage Learning. All rights reserved.

A Monopolistically Competitive Firm: Economic Loss : 

A Monopolistically Competitive Firm: Economic Loss 5 Copyright © Cengage Learning. All rights reserved.

Entry and Normal Profit : 

Entry and Normal Profit 6 Copyright © Cengage Learning. All rights reserved.

Perfect Competition and Monopolistic Competition Compared : 

Perfect Competition and Monopolistic Competition Compared 7 Copyright © Cengage Learning. All rights reserved.

Nonprice Competition : 

Nonprice Competition The firm attempts to establish its product as a different product from that offered by its rivals. Differentiation means that in the consumer’s mind, the product is not the same. Marketing is often the key to successful differentiation. Firms may differentiate products by perceived quality, reliability, color, style, safety features, packaging, purchase terms, warranties and guarantees, location, availability (hours of operation) or any other features. Brand names may signal information regarding the product, reducing consumer risk. 8 Copyright © Cengage Learning. All rights reserved.

Advertising, Prices, and Profits : 

Advertising, Prices, and Profits Product differentiation reduces the price elasticity of demand, which appears as a steeper demand curve. Successful product differentiation enables the firm to charge a higher price. 9 Copyright © Cengage Learning. All rights reserved.

Location under Monopolistic Competition : 

Location under Monopolistic Competition 10 Copyright © Cengage Learning. All rights reserved.

Brand Name : 

Brand Name A brand name is valuable to a firm; it makes the demand less elastic and can enable the firm to earn higher profits. Once a consumer has had a positive experience with a good, the price elasticity of demand for that good typically decreases—the consumer becomes loyal to the product. 11 Copyright © Cengage Learning. All rights reserved.

Oligopoly : 

Oligopoly An oligopoly is a market structure characterized by: Few firms Either standardized or differentiated products Difficult entry A key characteristic of oligopolies is that each firm can affect the market, making each firm’s choices dependent on the choices of the other firms. They are interdependent. 12 Copyright © Cengage Learning. All rights reserved.

Interdependence : 

Interdependence The importance of interdependence is that it leads to strategic behavior. Strategic behavior is the behavior that occurs when what is best for A depends upon what B does, and what is best for B depends upon what A does. Oligopolistic behavior includes both ruthless competition and cooperation. 13 Copyright © Cengage Learning. All rights reserved.

Game Theory : 

Game Theory Strategic behavior has been analyzed using the mathematical techniques of game theory. Game theory provides a description of oligopolistic behavior as a series of strategic moves and countermoves. 14 Copyright © Cengage Learning. All rights reserved.

Dominant Strategy : 

Dominant Strategy In an oligopoly, firms try to achieve a dominant strategy—a strategy that produces better results no matter what strategy other firms follow. The interdependence of oligopolies decisions can often lead to the prisoners’ dilemma. 15 Copyright © Cengage Learning. All rights reserved.

Dilemma: dominant strategy game : 

Dilemma: dominant strategy game 16 Copyright © Cengage Learning. All rights reserved.

Prisoners’ Dilemma : 

Prisoners’ Dilemma 17 Copyright © Cengage Learning. All rights reserved.

Nash equilibrium : 

Nash equilibrium A Nash equilibrium occurs when a unilateral move by a participant does not make the participant better off. 18 Copyright © Cengage Learning. All rights reserved.

Cooperation and Cartels : 

Cooperation and Cartels If the firms in an oligopoly cooperate, they may earn more profits than if they act independently. Collusion, which leads to secret cooperative agreements, is illegal in the U.S., although it is legal and acceptable in many other countries. Price-Leadership Cartels may form in which firms simply do whatever a single leading firm in the industry does. This avoids strategic behavior and requires no illegal collusion. 19 Copyright © Cengage Learning. All rights reserved.

Cartels : 

Cartels A cartel is an organization of independent firms whose purpose is to control and limit production and maintain or increase prices and profits. Like collusion, cartels are illegal in the United States. Conditions necessary for a cartel to be stable (maintainable): There are few firms in the industry. There are significant barriers to entry. An identical product is produced. There are few opportunities to keep actions secret. There are no legal barriers to sharing agreements. 20 Copyright © Cengage Learning. All rights reserved.

OPEC as an Example of a Cartel : 

OPEC as an Example of a Cartel OPEC: Organization of Petroleum Exporting Countries. Attempts to set prices high enough to earn member countries significant profits, but not so high as to encourage dramatic increases in oil exploration or the pursuit of alternative energy sources. Controls prices by setting production quotas for member countries. Such cartels are difficult to sustain because members have large incentives to cheat, exceeding their quotas. 21 Copyright © Cengage Learning. All rights reserved.

The Diamond Cartel : 

The Diamond Cartel In 1870 huge diamond mines in South Africa flooded the gem market with diamonds. Investors at the time wanted to control production and created De Beers Consolidated Mines, Ltd., which quickly took control of all aspects of the world diamond trade. The Diamond Cartel, headed by DeBeers, has been extremely successful. While other commodities’ prices, such as gold and silver respond to economic conditions, diamonds’ prices have increased every year since the Depression. This success has been achieved by DeBeers’ influence on the supply of diamonds, but also via the cartel’s influence on demand. In the 1940s DeBeers’ instigated an advertising campaign making the diamond a symbol of status and romance. 22 Copyright © Cengage Learning. All rights reserved.

Behavior of a Cartel : 

Behavior of a Cartel 23 Copyright © Cengage Learning. All rights reserved.

Facilitating Practices : 

Facilitating Practices Facilitating practices are actions by oligopolistic firms that can contribute to cooperation and collusion even thought the firms do not formally agree to cooperate. Cost-plus or mark-up pricing is a pricing policy whereby a firm computes its average costs of producing a product and then sets the price at some percentage above this cost. 24 Copyright © Cengage Learning. All rights reserved.

Summary of market structures : 

Summary of market structures 25 Copyright © Cengage Learning. All rights reserved.

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