Chapter 11
Review of
Chapter 10 concepts:
|
|
Perfect
Competition |
Monopolistic
Competition |
Oligopoly |
Monopoly |
||
|
Number of Firms |
Great
many
|
|
|
one |
||
|
Most of the economic activity in the U.S. takes
place in markets that are either monopolistically competitive or
oligopolistic. |
Homogeneous
|
|
|
unique |
||
|
Ease of Entry & Exit |
very easy |
|
|
very difficult |
||
|
Amount of Information |
complete |
|
|
complete |
||
|
Degree of price control |
none |
|
|
great deal |
||
|
Example |
wheat |
|
|
FPL |
I.
Monopolistic Competition is a market organization in which
many firms produce goods that are different but similar enough to be substitutes.
Monopolistic Competition has some
characteristics of monopoly and some of perfect competition. For the most part it is closer to perfect
competition than it is to monopoly.
A. Number
of Sellers there
are many firms from which a given type
of product can be bought.
B.
Type of Product Sold there is product differentiation in
this type of system.
Product Differentiation is the concept that the product of
one form can be distinguished from the products of other firms. There may be
actual physical differences or the
differences might be psychological (ex.
Coke vs Pepsi)
For
products to be considered differentiated, consumers must be able to tell one
product from another.
q
Physical Differences include function, quality, brand,
trademark, or packaging.
q
Psychological Differences appealing characteristics etc.
C. Ease
of Entering or Leaving the Industry
entry into and exit from monopolistically competitive industries is
relatively easy. There are few, if any regulations imposed by the government.
D. Amount
of Information these
firms have reasonably complete information about conditions that may affect the
business. Each firm knows approximately
how much other firms pay for labor, raw materials, and other inputs. They also find out all of the prices that
other companies charge for their products.
E.
Degree of Price Control firms in monopolistic competition
have some control over price but not very much. The degree of price control any firm has, depends on how
different the consumers think the product is.
In some industries, there are relatively few
firms or a few dominant firms with many smaller firms selling similar products.
II.
Oligopolies is a form of market organization in
which there are relatively few firms.
Oligopolies have some of the characteristics of both perfect competition
and monopoly. Overall, the industries
that would be classified as oligopolies are closer to monopolies in terms of
how the firms behave.
A. Number
of Sellers usually
there are a few firms operating in an oligopoly. The car industry is the perfect example, they take the actions
and reactions of the other firms into account when making economic
decisions. This interdependence that
influences economic behavior is one key element of oligopoly.
B. Type
of Product Sold the
products produced by different firms can be either nearly identical or
differentiated.
Pure Oligopoly is an oligopoly in which the products are the same for all
firms. Examples include aluminum, steel
etc
Differentiated Oligopoly - -is an oligopoly in which the
product is differentiated. These
differences again, can be physical differences as well as psychological. Examples include the car industry.
C. Ease
of Entering or Leaving the Industry
It is difficult to enter and leave an industry that is
oligopolistic. The following are the
reasons for this:
1. Expensive
& Sophisticated Equipment involved
therefore new entrants will need a great deal of money to enter the car
industry for example. It is also
difficult to leave due to these reasons.
2. Brand
Awareness consumers
develop strong brand preferences that can be quite difficult to change.
D. Amount
of Information - firms have less complete information about
the market than in other forms of industry organization. Companies generally know how much each pays
for labor but not for other inputs.
Because of their size, some oligopolistic firms can get price reductions
that other firms cannot get.
Trade Secrets most trade secrets exist in
oligopolistic industries than in any other type.
E. Degree
of Price Control
firms in differentiated oligopolies have a great deal of control over
price. These firms spend a large amount
of money on advertising in order to encourage consumers to try their products.
Firms in a pure oligopoly have some control
over price, but they usually have less control than firms in a differentiated
oligopoly.
Collusion and Cartels Since there are relatively few
separate firms in an oligopoly, there is often incentives for them to make
joint decisions.
Collusion is the situation of firms acting
together rather than separately. If
this collusive behavior becomes formal and well organized, the firms become
what is called a cartel.
Cartel is a formal organization of firms in
the same industry acting together to make decisions.
The
objective of having collusion and/or forming a cartel is to give the group of
firms the power of a monopoly. The most
famous cartel is OPEC. This cartel has
controlled oil prices and output throughout the world. In the U.S. cartels, are illegal.
Price Leadership In oligopolistic industries,
cooperation between firms exists but falls short of being a full cartel. Price Leadership happens when one firm in an
industry sets a price and other firms follow (reactive).
|
|
Perfect
Competition |
Monopolistic
Competition |
Oligopoly |
Monopoly |
|
Number of Firms |
Great
many
|
many |
few & interdependent |
one |
|
Type of Product |
Homogeneous
|
differentiated |
differentiated or homogeneous |
unique |
|
Ease of Entry & Exit |
very easy |
relatively easy |
difficult |
very difficult |
|
Amount of Information |
complete |
reasonably complete |
incomplete |
complete |
|
Degree of price control |
none |
some |
varying degree |
great deal |
|
Example |
wheat |
Hair Cuts |
Car Industry |
FPL |