OUTLINE CHAPTER 12
Price and Output Determination: Monopolistic Competition & Oligopoly

MONOPOLISTIC COMPETITION

I. Introduction: Four Product Market Models

A. Competitive Market (Ch. 10)
B. Monopoly (Ch. 11)
C. Monopolistic Competition (Ch. 12)*
D. Oligopoly (Ch. 12)

II. Characteristics

A. NUMBER OF FIRMS: many

1. Small market share (Small concentration ratio)
2. No collusion
3. Independent actions (no mutual interdependence)

B. TYPE OF PRODUCT: differentiated
C. CONTROL OVER PRICE:

1. within narrow limits

2. little econ. power

D. EASE OF ENTRY: relatively easy entry
E. NONPRICE COMPETITION: very much

III. Examples

IV. Price and Output Determination

A. Benefit-Cost Analysis 2 Steps
B. Demand and Monopolistic Competition

1. downsloping
2. quite price elastic - WHY?

C. Three Short Run Cases

1. profit maximizing economic profits
2. loss minimizing
3. shut down

D. Long Run Equilibrium

1. tends toward normal profits

a. profits: firms enter
b. losses: firms leave
c. complications

2. graphically

E. Quick Quiz

V. Monopolistic Competition and Efficiency

A. Allocative Inefficiency

1. Short Run: P MC

a) underallocation of resources:
b) but close with elastic demand
c) also, some utility gained from product differential

2. Long Run: normal profits

B. Productive Inefficiency

1. P MC = ATC (not minimum ATC)
2. excess capacity
3. also, advertising may increase costs without increasing utility

VI. Non-price Competition

A. Product Differentiation

1. definition
2. examples

a) product quality
b) services
c) location
d) advertising and packaging

3. effect on demand and profits

B. Product Development
C. Advertising

1. effect on demand
2. effect on cost
3. the cast FOR advertising: leads to efficiency

a. information
b. competition
c. more efficient

4. the case AGAINST advertising: causes inefficiency

a. persuasion
b. concentration
c. wasteful

5. empirical evidence

OLIGOPOLY

I. Introduction: Four Product Market Models

A. Competitive Market (Ch. 10)
B. Monopoly (Ch. 11)
C. Monopolistic Competition (Ch. 12)*
D. Oligopoly (Ch. 12)

II. Characteristics

A. NUMBER OF FIRMS: few

1. mutual interdependence
2. collusion possible

B. TYPE OF PRODUCT: homogenous OR differentiated
C. CONTROL OVER PRICE:

1. much with collusion
2. limited by mutual interdependence

D. EASE OF ENTRY: significant obstacles
E. NONPRICE COMPETITION: much with differentiated products

III. Examples and concentration Ratios

A. Examples
B. Concentration Ratios / The Herfindahl index

1. localized markets
2. interindustry competition
3. world trade
4. performance

IV. Price and Output Determination

A. No Standard Model But Common Pricing Characteristics

1. Why no common model

a) diversity of specific market situations
b) collusion possible
c) mutual interdependence

2. Common pricing characteristics

a) prices tend to be inflexible
b) when prices do change, firms tend to change prices together

B. Four Oligopoly Pricing Models

1. kinked demand: noncollusive oligopoly
2. collusion
3. price leadership
4. cost-plus pricing

C. Kinked Demand: Noncollusive Oligopoly

1. demand and MR curve

a. if competitors IGNORE
b. if competitors MATCH
c. assume:

(1)ignore price increases
(2)match price decreases

2. price and output determination
3. price inflexibility
4. criticisms
5. Quick Quiz

D. Collusive Oligopoly

1. definition collusion
2. examples
3. price and output determination

a. assumptions
b. joint profit maximization
c. graph

4. overt collusion: the OPEC cartels
5. covert collusion

a. electrical equipment conspiracy
b. ND highway contractors
c. food companies
d. airlines and the F-U fare

6. obstacles to collusion

a. demand and cost differences
b. number of firms
c. cheating
d. recession
e. potential entry
f. legal obstacles: antitrust

E. Price Leadership Tacit Collusion

1. definition
2. examples

F. Cost - Plus Pricing

1. definition
2. examples

V. Role of Non price Competition

VI. Oligopoly and Efficiency

A. Allocative Efficiency
B. Productive Efficiency
C. Dynamic Efficiency ?

1. dynamically inefficient view

a. means
b. incentive?

2. dynamically efficient view: Schumpeter - Galbraith

a. means
b. incentive