Monopolistic competition and oligopoly

Monopolistic competition

• Many firms compete in open market

• Products are similar but not identical

• Low barriers to entry

• Some control over prices

Monopolistic competition is like a modified type of perfect

competition with differences in products

Product differentiation is the key difference

Firms under monopolistic competition try not to compete on price alone-

nonprice compeititon

• Different physical characteristics- size, shape, color, texture, taste

• Location or availability

• Service level

• Advertising, image, status

Oligopoly

• Market dominated by a few large, profitable firms- 4 largest firms produce at least 70-80% of output

• Some variety of products

• High barriers to entry

• Have some control over prices

Oligopolies exist

• Usually because of significant barriers to entry (auto industry or steel industry)

• Economies of scale

Oligopolistic firms can illegally work together to set prices and bar

competing firms from entering the market

• Price leadership- price increases and cuts followed by others

• Collusion- agreement to set prices and production levels (price fixing)

• Cartels-agreement by a formal organization of producers to set prices and production

OPEC

Regulation and Deregulation

• Markets dominated by one or a few large firms tend to have higher prices and lower output than competitive markets

• Mergers and cartels can lead to anticompetitive behavior

• Predatory pricing-setting market prices below costs for the short term to drive competitors out of business

Predatory pricing

Antitrust legislation

• Trust- illegal grouping of companies that discourage competition

• Sherman Antitrust Act- outlaws mergers and monopolies that limit trade

• Clayton Antitrust Act- outlaws practices that limit competition or lead to monopoly

Regulating anticompetitive business practices

Breaking up monopolies

Breaking up monopolies

Blocking mergers

Deregulation

Analysis of deregulation

• Has led to lower prices and less red tape

• Safety issues and business practices may be questionable

• Many mergers have followed, leading to a less competitive environment