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COMPETITION AND
OLIGOPOLY
Objectives
Product Differentiation
Firms in monopolistic competition practice product
differentiation, which means that each firm makes a
product that is slightly different from the products of
competing firms.
Monopolistic Competition
It earns an economic
profit (as in this example)
when P > ATC.
Output and Price in Monopolistic
Competition
Marketing
A firm’s marketing program uses advertising and
packaging as the two principal methods to market its
differentiated products to consumers.
Firms in monopolistic competition incur heavy marketing
and advertising expenditures to enhance the perception of
quality differences between their product and rival
products. These costs make up a large portion of the price
for the product.
ATC AFC AVC
Manufacturer (Asia)
Materials 9.00 9.00
Cost of labor 2.75 2.75
Cost of capital 3.00 3.00
Profit 1.75 1.75
Shipping 0.50 0.50
Import duties 3.00 3.00
Nike (Beaverton, Oregon)
Sales, distribution, and administration 5.00 5.00
Advertising 4.00 4.00
Research and development 0.25 0.25
Nike’s profit 6.25 6.25
Retailer (your town)
Sales clerks’ wages 9.50 9.50
Shop rent 9.00 9.00
Retailer’s other costs 7.00 7.00
Retailer’s profit 9.00 9.00
Totals $70.00 $6.50 $63.50
Product Development and Marketing
Fluctuations in MC that
remain within the
discontinuous portion of the
MR curve leave the profit-
maximizing quantity and
price unchanged.
For example, if costs
increased so that the MC
curve shifted upward from
MC0 to MC1, the profit-
maximizing price and
quantity would not change.
Oligopoly
S10
Oligopoly
S10
Oligopoly
S10
Oligopoly
But if the price was $1.00, the 10 small firms would supply
only half the market, leaving the rest to the large firm.
Oligopoly
The demand curve for the large firm’s output is the curve
XD on the right.
Oligopoly
The large firm can set the price and receives a marginal
revenue that is less than price along the curve MR.
Oligopoly
The small firms take this price and supply the rest of the
quantity demanded.
Oligopoly
Because there are two players and two actions for each
player, there are four possible outcomes:
Both confess
Both deny
Art confesses and Bob denies
Bob confesses and Art denies
Oligopoly Games
To find that profit, we set marginal cost for the cartel equal to
marginal revenue for the cartel. Figure 13.9 shows this
outcome.
Oligopoly Games
THE
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