💸Principles of Economics Unit 10 – Monopolistic Competition & Oligopoly
Monopolistic competition and oligopoly are market structures that fall between perfect competition and monopoly. These models explain how firms compete when they have some control over prices but face competition from rivals.
In monopolistic competition, many firms sell differentiated products with low entry barriers. Oligopolies feature a few dominant firms with high entry barriers. Both involve strategic behavior, non-price competition, and varying levels of long-term profitability.
In the long run, entry of new firms drives economic profits to zero (P = ATC)
Firms operate with excess capacity, as the demand curve is tangent to the average total cost curve
Oligopolistic firms can maintain economic profits in the long run due to high barriers to entry
The long-run equilibrium depends on the specific oligopoly model and the degree of collusion
In both market structures, firms engage in non-price competition to differentiate their products and maintain market share
Real-World Examples
Monopolistic competition examples include restaurants, hair salons, and clothing retailers
Differentiation through location, quality, service, and branding
Oligopoly examples include automobiles (GM, Ford, Toyota), airlines (Delta, American, United), and wireless carriers (Verizon, AT&T, T-Mobile)
High concentration ratios and strategic behavior
Collusive behavior has been observed in industries such as airlines (price fixing) and LCD panels (price fixing and market allocation)
Non-price competition is evident in the advertising expenditures of firms in industries like soft drinks (Coca-Cola and Pepsi) and fast food (McDonald's and Burger King)
Economic Impact and Efficiency
Monopolistic competition results in some deadweight loss due to excess capacity and prices above marginal cost
However, product differentiation can increase consumer choice and satisfaction
Oligopolies can lead to higher prices and reduced output compared to perfect competition, resulting in deadweight loss
Collusive behavior exacerbates these inefficiencies
Non-price competition in both market structures can lead to socially excessive expenditures on advertising and product differentiation
However, non-price competition can also drive innovation and improve product quality
The overall impact on social welfare depends on the specific industry and the extent of competition or collusion
Government intervention, such as antitrust laws and regulation, can help promote competition and efficiency in these market structures