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By Mark Hirschey
Chapter 13 OVERVIEW
Contrast Between Monopolistic Competition and Oligopoly Monopolistic Competition Monopolistic Competition Process Oligopoly Cartels and Collusion Oligopoly Output-Setting Models Oligopoly Price-Setting Models Market Structure Measurement Census Measures of Market Concentration
monopolistic competition oligopoly high-price/low-output equilibrium low-price/high-output equilibrium cartel collusion Cournot model output-reaction curve Stackelberg model first-mover advantage price signaling price leadership
barometric price leadership Bertrand model price-reaction curve contestable markets theory Sweezy model kinked demand curve oligopoly theory economic census North American Industry Classification System (NAICS) concentration ratios Herfindahl-Hirschmann Index (HHI)
Monopolistic Competition
Large number of sellers that offer differentiated products. Normal profit opportunity in long-run equilibrium.
Few sellers. Economic profits are possible in long-run equilibrium. Timely market structure information is required for managerial investment decisions
Oligopoly
Monopolistic Competition
Monopolistic Competition Characteristics Many buyers and sellers. Product heterogeneity. Free entry and exit. Perfect information. Opportunity for normal profits in long-run equilibrium.
Set M = MR - MC = 0 to maximize profits. MR=MC at optimal output. No durable economic profits because P=AR=AC.
With homogenous products, P=AC at minimum LRAC. This is a competitive market equilibrium with homogeneous production.
Oligopoly
Few sellers. Homogenous or unique products. Blockaded entry and exit. Imperfect dissemination of information. Opportunity for above-normal (economic) profits in long-run equilibrium. National markets for aluminum, cigarettes, electrical equipment, filmed entertainment, ready-to-eat cereals, etc. Local retail markets for gasoline, food, specialized services, etc.
Examples of Oligopoly
Collusion exists when firms reach secret, covert agreements. Cartels are typically rather short-lived because coordination problems often lead to cheating. Cartel subversion can be extremely profitable. Detecting the source of secret price concessions can be extremely difficult.
Enforcement Problem
Cournot Oligopoly Cournot equilibrium output is found by simultaneously solving output-reaction curves for both competitors. Cournot equilibrium output exceeds monopoly output but is less than competitive output.
Stackelberg Oligopoly
Stackelberg model posits a first-mover advantage. Price wars severely undermine profitability for both leading and following firms. Price signaling can reduce uncertainty in oligopoly markets. Price leadership occurs when firms follow the industry leaders pricing policy.
The Bertrand model focuses upon the price reactions. The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.
The Bertrand model demonstrates how price-setting oligopolists profit with differentiated products.
Sweezy Oligopoly
Sweezy model predicts sticky prices. Sweezy model explains why prices in oligopoly markets sometimes fail to respond to marginal cost change.
Cournot model does not incorporate output reactions. Bertrand model does not incorporate price reactions. Stackelberg model explains first-mover advantages, but does not explain countermoves. Sweezy model is incomplete. Modeling behavior in oligopoly markets is difficult.
Economic Markets
An economic market consists of all individuals and firms willing and able to buy or sell. When cross-price elasticities are large and positive, goods are competing products.
The economic census provides a comprehensive statistical profile of the economy. Industry statistics are classified using the North American Industry Classification System (NAICS).
Economic Census
Concentration Ratios
Group market share data are called concentration ratios. CRi = Xi, where Xi is market share of the ith leading firm.
CRi = 100 for monopoly. CRi 0 for a perfectly competitive industry.
Herfindahl-Hirschmann Index
Calculated in percentage terms, the HHI is the sum of squared market shares for all competitors. HHI = Xi2, where Xi2 is squared market share of the ith firm.