- There are both similarities and differences between perfect competition and monopolistic competition in the long run. Based on your understanding of this, write a summary of to what extent the two market structures will yield different long run outcomes in terms of: (1) the relationship between price and marginal cost at the quantity the firm decides to produce, and (2) the relationship between marginal cost and average total cost at the quantity that the firm decides to produce. Also, briefly discuss what these differences have to do with the efficiency of the typical firms under these different forms of competition?
* Monopolistic competition is a market structure that shares both some of the characteristics of competitive markets and yet each firm makes decisions in much the same way as a monopoly would.
Monopolistic competitors are like monopolists in that firms under both market structures face downward-sloping demand curves. Each firm in monopolistic markets produces a unique product that is in some way differentiated from what is offered by its competitors. So, the firms market power comes from differentiated products. Examples include local restaurants, dry cleaners, convenience stores, vintage wine, etc. The analyses of output and pricing policies are similar in the cases of monopolistic competition and monopoly. The difference between monopoly and monopolistic competition lies in the fact that in monopolistic competition, economic profits invite entry of new competitors which bring down the profits of incumbent firms.
- With the aid of specific examples, review and discuss under what circumstances cartels are most likely to succeed and under what circumstances cartels are most likely to fail.
* Oligopolies exist in markets when:
- A relatively small number of firms produces most of the market output and these firms band together to influence prices and quantities in the market
- Effective entry barriers reduce competitive pressure on incumbent firms.
- Each firm is large enough (relative to the size of the market) to have a direct and observable effect on the rest of the firms in the market.
- Firm interdependence requires strategic thinking by each firm
What happens in different oligopolistic situations depends on the specific peculiarities of different markets. Ultimate outcomes depend on production technologies, resource markets, the cost structure of firms, national laws, consumer behavior, the specific nature of entry barriers, etc. Outcomes in oligopolistic markets are ultimately determined by strategic interactions between firms. What eventually happens in any given oligopolistic situation can vary wildly from one situation to another. In some cases you may find complete cooperation and even collusion between firms and in other cases you may find hostile rivalry and even deliberately destructive competition that is intended to drive competitors out of business. There is no such thing as a single model that captures all the possible outcomes that may occur in Oligopolistic Markets.
Economists sometimes distinguish pure oligopolies, where every firm produces the same thing, from differentiated oligopolies, where each firm produces similar but differentiated products.
Examples of differentiated oligopolies can be found in markets such as the ones for automobiles, colas, and major breweries.
Examples of pure oligopolies are mostly found in commodity markets, such as steel, aluminum and oil.
Cartels are often found when just a few sellers dominate commodity markets. Cartels:
- Are established when producers in oligopoly collude to fix price and reduce output levels.
- Cartels are generally illegal in the U.S. (with some important exceptions), but are often supported by governments in other countries.
- Unfettered self-interest by cartel members usually results in a failure of the cartel.
- If the cartel does last, then repeated interactions over time may increase the incentives for individual cartel members to cooperate with the overall goals of the cartel.
- OPEC is probably the world’s most famous cartel