ECN 101 Chapter Notes - Chapter 12: Price War, Imperfect Competition, Dominate
28 May 2018
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Chapter 12
ECN 101
!1
Monopolist competition and Oligopoly
Four firm concentration ratio
= output of four largest firms / total output in the industry
Herfindahl index - the sum of the squared percentage market shares (percentage of total
sales) of all firms in the industry.
The larger it is the greater the market power within an industry.
Monopolistic competition (mixes a small amount of monopoly power with a large amount
of competition):
characterized by -
1. relatively large number of sellers *competitive aspect
2. differentiated products (often promoted by heavy advertising - its a big deal since it
produces differentiated products) *monopolistic aspect
3. easy entry and exit from industry *competitive aspect
4. monopolistic competitive industries are more competitive then monopolistic.
Relatively Large Number of Sellers
1. Small Market Shares (limited control over market price)"
2. No Collusion (
2. Independent Action (each firm can determine its own pricing policy, usually not tigers a
response from other firms)
Product differentiation - making many different versions of the same product (unlike the
perfect competition where the product is standardized)
- how the product differentiates?
1. Service
2. location
3. brand names and packaging
4. some control over price
Easy entry and exit (firms and capital requirements are typically small)
Advertising and differentiation’s goal is - Non Price competition (to make price less of a factor
in consumer’s purchase and make product differences a greater factor)
Monopolistic Competitive industries
Four firm concentration ratio
= output of four largest firms / total output in the industry
Herfindahl index - the sum of the squared percentage market shares (percentage of total
sales) of all firms in the industry.
find more resources at oneclass.com
find more resources at oneclass.com
Chapter 12
ECN 101
!2
Price and Output in Monopolistic Competition:
in the short run:
- produce where MR=MC
- same as for perfect competition and monopoly, monopolistic competition uses MR=MC to
maximize their profit and minimize loss.
in the long run: only a normal profit (not always, here is why :
Entry and exit push profits toward normal.
1. is the firm in a monopolistic competition can use fully its monopolistic power then it earns
more profit.
Inefficient: P > MC and > min ATC , but to compensate we have product variety
Monopolistic competition has neither productive nor allocative efficiency.
Allocative efficiency is a state of the economy in which production represents consumer
preferences; in particular, every good or service is produced up to the point where the last unit
provides a marginal benefit to consumers equal to the marginal cost of producing.
P > MC
Productive efficiency is a situation in which the economy could not produce any more of one
good without sacrificing production of another good. The concept is illustrated on a production
possibility frontier (PPF), where all points on the curve are points of productive efficiency.
P > ATC
Excess capacity: plant or equipment that is underused because firms are producing less than
the minimum-ATC output,. (small town restaurants operate on less than half of their capacity)
Product Variety:
the optimal combination of price, product and advertising can’t be forcast.
OLIGOPOLY:
a market structure dominated by a few large producers of an homogeneous or differentiated
product (LCBO)
- small number (control over their prices)
Homogeneous or differentiated oligopoly - depends on weather the product is standardized
or differentiated.
Control over price - oligopoly can set its price and output levels to maximize it’s profit.
Strategic behaviour - self-interest behaviour
Mutual Interdependence - one oligopolies price depends on another one
Interindustry competition - competition between two products associated with different
industries.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The larger it is the greater the market power within an industry. Monopolistic competition (mixes a small amount of monopoly power with a large amount of competition): characterized by - Relatively large number of sellers: small market shares (limited control over market price) Independent action (each rm can determine its own pricing policy, usually not tigers a response from other rms) Product differentiation - making many different versions of the same product (unlike the perfect competition where the product is standardized) 2. location: brand names and packaging, some control over price. Easy entry and exit ( rms and capital requirements are typically small) Advertising and differentiation"s goal is - non price competition (to make price less of a factor in consumer"s purchase and make product differences a greater factor) = output of four largest rms / total output in the industry.
