CHAPTER 26



CHAPTER 26

Monopolistic Competition and Oligopoly

Summary

1. What is monopolistic competition?

• 1. Monopolistic competition is a market structure in which many firms are producing a slightly different product and entry is easy. §1

• 2. Monopolistically competitive firms will earn a normal profit in the long run. §1.a.2

2. What behavior is most common in monopolistic competition?

• 3. Entry occurs in monopolistically competitive industries through the introduction of a slightly different product. §1.a

• 4. A monopolistically competitive firm will produce less output and charge a higher price than an identical perfectly competitive firm if demand and costs are assumed to be the same. §1.b

3. What is oligopoly?

• 5. Oligopoly is a market structure in which a few large firms produce identical or slightly different products and entry is difficult but not impossible. The firms are interdependent. §2

4. In what form does rivalry occur in an oligopoly?

• 6. Oligopoly may arise from government restrictions or from natural economic factors such as economies of scale. §2.a

• The prisoner’s dilemma illustrates an outcome where competition among interdependent firms results in an outcome that is less than the best for each firm. §2.ab.2

• 78. Strategic behavior characterizes oligopoly. The firms are interdependent. Each oligopolist will affect its competitors with its actions and will be affected by the actions of its rivalsmust watch the actions of other oligopolists in the industry. §2.b c

• 89. The kinked demand curve results when firms follow a price decrease but do not follow a price increase. §2.b.1

5. Why does cooperation among rivals occur most often in oligopolies?

• 910. The small number of firms in oligopoly and the interdependence of these firms creates the situation where the firms are better off if they cooperate (as in the prisoner’s dilemma). §2.b.2, 2.c

• 1011. Price leadership is another type of strategic behavior. One firm determines price for the entire industry. All other firms follow the leader in increasing and decreasing prices. The dominant firm in the industry is most likely to be the price leader. §2.c.1

• 1112. Practices like collusion and cartels minimize profit- reducing rivalry and ensure cooperation. Both are illegal in the United States but acceptable in many other nations. §2.c.2

• 1213. Cost-plus pricing ensures that firms with the same costs will charge the same prices. The most-favored- customer policy guarantees a customer that the price he or she paid for a product will not be lowered for another customer. Cost-plus pricing and the most- favored-customer policy are facilitating practices. §2.c.3

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