Includes industries in which firms have competitors but do not face so much competition that they are price takers.
Imperfectly Competitive Markets
2. Monopolistic Competition
Only a few sellers, each offering a similar or identical product to the others.
Many firms selling products that are similar but not identical.
Strategic interdependence: each firm's actions affect the decisions made by all other firms
Tension between cooperation and self-interest.
Relatively few firms, usually less than 10.
The products firms offer can be either slightly differentiated or homogeneous.
Different strategic approaches are modeled: -No single model.
When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output _________ than the level produced by monopoly and _____ than the level produced by competition.
An informal agreement among firms in a market about quantities to produce or prices to charge.
A formalized group of firms acting in unison.
__________ __________ prohibit explicit agreements among oligopolists as a matter of public policy, and/or sometimes perceived best interest, cheating leads to cut-throat competition.
Oligopolists engage in ______ ______ competition which leads to marginal cost pricing. The perfectly competitive end result.
Oligopoly Outcome: Joint Output
Greater than or equal to the monopoly quantity but less than or equal to the competitive industry quantity.
Oligopoly Outcome: Market Prices
Less than or equal to the monopoly price but greater than or equal to the competitive price.
Oligopoly Outcome: Total Economic Profits
Less than or equal to the monopoly profit but greater than or equal to 0, the perfectly competitive result.
Role of Strategic Interaction
Your actions affect the profits of your rivals.
Your rivals' actions affect your profits.
How will rivals respond to your actions?
Key Insight into Oligopolies
The effect of a price reduction on the quantity demanded of your product depends upon whether your rivals respond by cutting their prices too!
The effect of a price increase on the quantity demanded of your product depends upon whether your rivals respond by raising their prices too!
Strategic interdependence: You aren't in complete control of your own destiny!
Sweezy Model Environment
Few firms in the market serving many consumers.
Firms produce differentiated products.
Barriers to entry.
Each firm believes rivals will match or follow price reductions, but won't match or follow price increases.
Key feature: Price-rigidity
Sneezy Oligopoly Summary
Firms believe rivals match price cuts, but not price increases.
Firms operating in a Sweezy oligopoly maximize profit by producing where MRs = MC.
The discontinuous marginal revenue curve implies that there exists a range over which changes in MC will not impact the profit-maximizing level of output or price.
There is the same profit maximizing P and Q for lots of different MC curves
Bertrand Model Environment
Cut Throat Competition
Few firms that sell to many consumers.
Firms produce identical products at constant marginal cost.
Each firm independently sets its price in order to maximize profits. Price is each firms' control variable.
Barriers to entry exist.
Consumers enjoy: -Perfect information -Zero transaction costs
P1 = P2 = MC
Optimal Price and Output
Beliefs about the reactions of rivals.
Your choice variable, price or quantity, and the nature of the product market, differentiated or homogeneous products.
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Series 7 Top-Off Exam Preparation | Knopman Marks Guide