CPT Section C General Economics Chapter 4 Unit 3 Monopolistic Competition & Oligopoly Ms.Prem J.Bhutani

Transcription

1 CPT Section C General Economics Chapter 4 Unit 3 Monopolistic Competition & Oligopoly Ms.Prem J.Bhutani

2 Definitions and Descriptions of Monopolistic Competition Product Differentiation Profit Maximization in Short-Run and Long-Run Meaning of Oligopoly competition Types and Characteristics of Oligopoly Kinked Demand Curve Analysis

3 Meaning Features

4 Meaning On one extreme is the Perfect Competition model On the other extreme is the Monopoly Model Monopolistic Competition & Oligopoly are competitive scenarios that lie between these two extremes

5 Features of Monopolistic Competition and Oligopoly will emulate either Perfect Competition or Monopoly Power to set prices somewhat like a monopoly Face competition like perfect competition

6 Large number of firms Each firm has relatively small market share Each firm must be sensitive to average market price of its product Collusion is not possible due to the number of firms No barriers to entry or exit

7 Product Differentiation Each firm makes a product that is slightly different from the products of competing firms Close substitutes but no perfect substitutes An attempt to increase price will normally results in a lower volume sold

8 Competition on Quality, Price, Marketing: Quality is design, reliability, service provided to buyer and ease of access to product Price downward sloping demand curve Marketing firm must market = promotion, distribution, packaging

9 Product differentiation is crucial to monopolistic competition People value variety, even if it is not material (real) Product differentiation takes place in buyer s mind Variety is useful but costly we pay for it

10 Physical differences Convenience Ambience Reputations Appeals to vanity Unconscious fears and desires Snob appeal Customized products

11 Banks Radio Stations Clothing Computers Frozen Foods Canned Goods Sporting Goods Fish and Seafood Jewelry Health Spas Apparel Stores Convenience Stores

12 Short-run Equilibrium Long-run Equilibrium

13 Product differentiation It does not face a perfectly elasticity of demand Price maker for the product Downward Sloping demand curve

14 The monopolistic competitor can make a profit or take a loss As only one firm in a crowded industry it has a very elastic demand curve No one firm can get too far out of line on price because buyers can always purchase a substitute from some one else

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18 Meaning Features Forms

19 Oligopoly is an important form of imperfect competition Oligopoly is often described as competition among the few Consider the example of cold drinks industry or automobile industry There are a handful firms manufacturing cold drinks industry or automobile industry

20 Pure and Differentiated Oligopoly Open and closed oligopoly Collusive and Competitive Oligopoly Partial or full oligopoly Syndicate and Organized Oligopoly

21 Pure oligopoly: When the product are Homogeneous Imperfect oligopoly: When product are Differentiation Open oligopoly : A new firm can enter and compete Closed oligopoly: Entry is restricted

22 Collusive : Firms come to common understanding Competitive: Lack of understanding between the firm Partial oligopoly: Industry is dominated by one large firm Full oligopoly: Absence of price leadership Syndicate oligopoly: Selling product through centralized syndicates Organized oligopoly: The firm organize themselves

23 Interdependence Importance of Selling Cost Group Behavior

24 Interdependence: Decision making of the few firms which comprise the industry There will be a direct effect on the fortune of the rivals Closely watch the reaction of other firms in decision making

25 Importance of advertising and selling cost: Under oligopoly advertisement can become a life-and-death matter If the firm fails to keep up with the advertising budget customer will drift off to rival products

26 Group Behavior: The theory of oligopoly is a theory of group behavior It is not a mass or individual behavior

27 Price Rigidity Kinked Demand Curve

28 The firms know the ultimate outcome of price-cutting The firm would like to keep the price fairly at a lower level Price rise by a firm would result in losing the customers

29 Sweezy Model: The demand curve facing an oligopolist, has a kink at the level of the prevailing price The kink is formed at the prevailing price level It is because the segment of the demand curve above the prevailing price level is highly elastic and the segment of the demand curve below prevailing price level is inelastic.

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31 Form of Market Structure No. of Firms Nature of Product Price Elasticity of Demand of a Firm Degree of Control over Price (a) Perfect Competition A Large no. of Firms (b) Monopoly One Unique Product with close Substitute Homogenous Infinite None Small Very Considerable (c) Imperfect Competition (i) Monopolistic Competition A Large no. of Firms Differentiated Products (ii) Oligopoly Few Firms Homogenous or Differentiated Product Large Small Some Some

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