7-3: Monopolistic Competition and Oligopolies Notes
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1 7-3: Monopolistic Competition and Oligopolies Notes
2 Learning Target 1. I will demonstrate my understanding of the characteristics of monopolistically competitive firms and oligopolies.
3 Monopolistic Competition Monopolistic competition: when many sellers offer similar, but not standardized products Example: Think of the market for t-shirts (they come in all styles and brands)
4 Characteristics of Monopolistic Competition 1. Many producers/sellers: meaningful competition exists Example: there are many restaurants where you can buy a hamburger (Chili s, McDonalds, Applebee's, TGI Friday's, Burger King, etc.)
5 Characteristics of Monopolistic Competition 2. Differentiated products: firms seek to distinguish their goods and services from those of other firms, even when the goods are close substitutes Example: Toothpaste that will leave your breath fresher
6 Characteristics of Monopolistic Competition 3. Few barriers to entry: start-up costs are relatively low and this allows many firms to enter the market Example: multiple t-shirt companies enter the market
7 Characteristics of Monopolistic Competition 4. Some control over prices: firms have to be careful not to raise prices too high otherwise consumers might substitute other goods Example: Coke raises its price and consumers start buying Pepsi
8 Characteristics of Monopolistic Competition Monopolistic competitive firms use nonprice competition to compete with rival firms Nonprice competition is using product differentiation and advertising to attract customers
9 Characteristics of Monopolistic Competition This can be done in several ways: A firm may seek to distinguish their particular brand based on unique characteristics (color, design, look, smell, touch) A producer might emphasize their service as a way of charging a higher price
10 Characteristics of Monopolistic Competition A firm might have a convenient location that is attractive to customers A firm might point to its image/status to attract customers Goods are all natural or item is more fashionable
11 Oligopolies Oligopoly: market structure in which only a few sellers offer a similar product Generally a result of economies of scale (costs decrease as more goods are produced) Competition does exist
12 Characteristics of Oligopolies 1. Few producers: a small number of firms control the market An industry is considered an oligopoly if the 4 top producers together supply more than 60% of total output
13 Characteristics of Oligopolies 2. Similar products: goods are generally the same, with minor variations Examples: cereal, light bulbs, kitchen appliances, and soft drinks May also sell standardized products (such as steel)
14 Characteristics of Oligopolies 3. High barriers to entry: it is difficult for firms to break in the market and compete Existing companies may take advantage of economies of scale and it would be expensive for a microchip company to compete with a large firm
15 Oligopolies Acting As Monopolies In some cases, oligopolies actual behave like monopolies Firms might try to control prices and other, smaller firms, may follow suit Firms might try to control the market through collusion, or making pricing agreements This is illegal
16 Oligopolies Acting As Monopolies A cartel is an organization of producers established to set production and price levels for a product OPEC is a well-known cartel that consists of 12 countries that agree to set quotas on oil production and exports This is an example of the potentially harmful effects of an oligopoly
17 7-4: Regulation and Deregulation Today NOTES
18 Promoting Competition Regulation: set of rules or laws designed to control business behavior to promote competition and protect consumers
19 Antitrust Legislation Antitrust legislation: laws that define monopolies and give government the power to control them and break them up
20 Trust Trust: when a group of firms are combined to reduce competition in an industry Example: Standard Oil Company (controlled 90% of the market)
21 Merger Merger: when 2 firms join together to become 1 If a merger will eliminate competition it will be denied by the government
22 Enforcing Antitrust Legislation The FTC and the Department of Justice are responsible for enforcing antitrust laws Mergers that allow companies to dominate a particular industry are not permitted The goal is not to allow companies to reduce competition What would happen if the two largest cell phone companies tried to merge?
23 Unfair Business Practices Price fixing: when businesses work together to set prices of competing products Market allocation: when competing businesses negotiate to divide up a market (could be by region) Predatory pricing: setting low prices to drive small producers of the same good out of business
24 Deregulation Deregulation: reducing or removing government control of a business Results in lower prices for consumers and more competition Example: airline industry was deregulated in 1978
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