PRINCIPLE OF ECONOMIC
6 EDITION
KARL CASE, RAY FAIR
PRENTICE HALL BUSINESS PUBLISHING
COPY RIGHT 2002
Monopolistic Competition
•
A monopolistically competitive
industry has the following characteristics:
•
A large number of firms
•
No barriers to entry
•
Product differentiation
Monopolistic Competition
•
Monopolistic competition
is a common form of industry (market) structure in the United States,
characterized by a large number of firms, none of which can influence market
price by virtue of size alone.
•
Some degree of market power is achieved
by firms producing differentiated products.
•
New firms can enter and established
firms can exit such an industry with ease.
The Case for Product Differentiation and Advertising
•
The advocates of free and open
competition believe that differentiated products and advertising give the
market system its vitality and are the basis of its power.
•
Product differentiation helps to ensure
high quality and efficient production.
The Case for Product Differentiation and Advertising
•
Advertising provides consumers with the
valuable information on product availability, quality, and price that they need
to make efficient choices in the market place.
The Case Against Product Differentiation and
Advertising
•
Critics of product differentiation and
advertising argue that they amount to nothing more than waste and inefficiency.
•
Enormous sums are spent to create
minute, meaningless, and possibly nonexistent differences among products.
•
Advertising raises the cost of products
and frequently contains very little information. Often, it is merely an annoyance.
•
People exist to satisfy the needs of the
economy, not vice versa.
•
Advertising can lead to unproductive
warfare and may serve as a barrier to entry, thus reducing real competition.
Oligopoly
•
An oligopoly is a form of
industry (market) structure characterized by a few dominant firms. Products may be homogeneous or
differentiated.
•
The behavior of any one firm in an
oligopoly depends to a great extent on the behavior of others.
Oligopoly Models
•
All kinds of oligopoly have one thing in
common:
•
The behavior of any given oligopolistic
firm depends on the behavior of the other firms in the industry comprising the
oligopoly.
The Collusion Model
•
A group of firms that gets together and
makes price and output decisions jointly is called a cartel.
•
Collusion occurs when price- and
quantity-fixing agreements are explicit.
•
Tacit collusion
occurs when firms end up fixing price without a specific agreement, or when
agreements are implicit.
The Cournot Model
•
The Cournot model is a
model of a two-firm industry (duopoly) in which a series of output-adjustment
decisions leads to a final level of output between the output that would
prevail if the market were organized competitively and the output that would be
set by a monopoly.
The Kinked Demand Curve Model
•
The kinked demand model is
a model of oligopoly in which the demand curve facing each individual firm has
a “kink” in it. The kink follows from
the assumption that competitive firms will follow if a single firm cuts price
but will not follow if a single firm raises price.
The Price-Leadership Model
•
Price-leadership
is a form of oligopoly in which one dominant firm sets prices and all the
smaller firms in the industry follow its pricing policy.
•
Assumptions of the price-leadership
model:
•
The industry is made up of one large
firm and a number of smaller, competitive firms;
•
The dominant firm maximizes profit
subject to the constraint of market demand and subject to the behavior
of the smaller firms;
•
The dominant firm allows the smaller
firms to sell all they want at the price the leader has set.
•
Outcome of the price-leadership model:
•
The quantity demanded in the industry is
split between the dominant firm and the group of smaller firms.
•
This division of output is determined by
the amount of market power that the dominant firm has.
•
The dominant firm has an incentive to
push smaller firms out of the industry in order to establish a monopoly.
Predatory Pricing
•
The practice of a large, powerful firm
driving smaller firms out of the market by temporarily selling at an
artificially low price is called predatory pricing.
•
Such behavior became illegal in the
United States with the passage of antimonopoly legislation around the turn of
the century.
Game Theory
•
Game theory
analyzes oligopolistic behavior as a complex series of strategic moves and
reactive countermoves among rival firms.
•
In game theory, firms are assumed to
anticipate rival reactions.
Contestable Markets
•
A market is perfectly contestable
if entry to it and exit from it are costless.
•
In contestable markets, even large
oligopolistic firms end up behaving like perfectly competitive firms. Prices are pushed to long-run average cost by
competition, and positive profits do not persist.
Oligopoly is Consistent with a Variety of Behaviors
•
The only necessary condition of
oligopoly is that firms are large enough to have some control over price.
•
Oligopolies are concentrated
industries. At one extreme is the
cartel, in essence, acting as a monopolist.
At the other extreme, firms compete for small contestable markets in
response to observed profits. In between
are a number of alternative models, all of which stress the interdependence of
oligopolistic firms.
Oligopoly and Economic Performance
•
Oligopolies, or concentrated industries,
are likely to be inefficient for the following reasons:
•
They are likely to price above marginal
cost. This means that there would be
underproduction from society’s point of view.
•
Strategic behavior can force firms into
deadlocks that waste resources.
•
Product differentiation and advertising
may pose a real danger of waste and inefficiency.
The Role of Government
•
The Celler-Kefauver Act of 1950
extended the government’s authority to ban vertical and conglomerate mergers.
•
The Herfindahl-Hirschman Index
(HHI) is a mathematical calculation that uses market share figures to
determine whether or not a proposed merger will be challenged by the
government.
No comments:
Post a Comment