In This Lecture…Monopolistic

Competition – Pricing and Production Decision in Short Run and in Long Run

Oligopolistic Competition – Features and distinction from Monopolistic Competition

Monopolistic Competition

The theory of monopolistic competition is built on three assumptions:

There are many sellers and buyers.Each firm in the industry produces

and sells a slightly differentiated product.

There is easy entry and exit.

Monopolistic Competition

The monopolistic competitor is a price searcher.

For the monopolistic competitor, P > MR, and the marginal revenue curve lies below the demand curve.

The monopolistic competitor produces the quantity of output at which MR =MC.

It charges the highest price per unit for this output.

Monopolistic Competitive Firm’s Output and Price

(short-run) The monopolistic

competitor produces that quantity of output for which MR = MC at q1.

It charges the highest price consistent with this quantity, which is P1.

The Monopolistic Competitive Firm’s Long-run Equilibrium

Output and PriceUnlike the perfectly competitive firm,

the monopolistic competitor does not exhibit resource allocative efficiency.

Unlike the monopoly firm, the monopolistic competitive firm cannot earn profits in the long run (because of easy entry into the industry) unless it can successfully differentiate its product (e.g., by brand name) in the minds of buyers.

The Monopolistic Competitive Firm’s Long-run Equilibrium

Output and Price Because of easy

entry into the industry, there are likely to be zero economic profits in the long run for a monopolistic competitor. In other words, P = ATC.

Oligopoly

A theory of market structure based on three assumptions:

There are few sellers and many buyers.

Firms produce and sell either homogeneous or differentiated products.

There are significant barriers to entry.

Oligopolist

The oligopolist is a price searcher.It produces the quantity of output at

which MR = MC.

Types of Oligopoly

Perfect or Imperfect OligopolyNon-collusive or Collusive OligopolyDuopoly

Types of Oligopoly

Perfect or Imperfect Oligopoly If in an Oligopoly market, the firms

produce homogeneous products it is called perfect oligopoly.If the firms produce differentiated products, it is called imperfect oligopoly.

Types of Oligopoly

Non-collusive or Collusive OligopolyIf in an oligopoly market firms compete with each other it is called non-collusive oligopoly market or non-cooperative oligopoly market.If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly.

Types of Oligopoly

DuopolyWhen there are only two firms producing a product, it is called duopoly. It is a special case of oligopoly.

Oligopoly vs Monopolistic Competition

Number of buyers and sellersIn an oligopoly market, there

are few sellers but large number of buyers.

In monopolistic competition, there are large number of buyers and sellers.

Oligopoly vs Monopolistic Competition

Nature of ProductIn oligopoly market, the product

may be homogenous or differentiated.In monopolistic market, the

products are differentiated.Entry/ exit of firms

In oligopoly market, the entry and exit of firms are restricted while in monopolistic market it is not.