Monopolistic Competition and Oligopoly

Monopolistic Competition and Oligopoly

Preface

This paper is a literal summary of Chapter 13: Monopolistic Competition and Oligopoly including pages 501-548, from the book Managerial Economics, 12th Edition, 2009, written by Mark Hirschey. The objective of this summary is to extract and highlight the main points of this chapter and create a short guide trough it. The methodology used is paraphrasing and quotation. No references will be made since the sole source is known. No personal opinions or works and opinions of third parties will be included. The samples demonstrated in the chapter will be taken as such.

CONTRAST BETWEEN MONOPOLISTIC COMPETITION AND OLIGOPOLY

Monopolistic competition and oligopoly provide differing perspectives on the nature of competition in imperfectly competitive markets.

Monopolistic Competition

The economic environment faced by many firms cannot be described as perfectly competitive. Likewise, few firms enjoy clear monopoly. Real-world markets commonly embody elements of both perfect competition and monopoly. Firms often introduce valuable new products or processes innovations that give rise to above normal rates of return to the short run. In the long run, however, entry and imitation by rivals erode the dominant market share and returns begin to decline to normal levels. Still, in sharp contrast to perfectly competitive markets the unique product characteristics from individual firms remain valued by costumers, and even after there are similar or same products in the market costumers remain loyal to brands. This partly competitive, partly monopolistic market structure is called monopolistic competition. Monopolistically competitive firms are not price takers due to lack of perfect substitutes. Monopolistic competition is similar to perfect competition in that it embodies price competition among a large number of firms. The major difference between these two market structures is that the costumers perceive important differences in the products of monopolistically competitive firms, while the products in a perfectly competitive market are all identical. This gives monopolistically competitive firms discretion in price setting.

Characteristics of Monopolistically Competitive Markets

In monopolistic competition most firms experience downward-sloping demand curves that signify less-than-perfect competition. Monopolistic competition exists when firms have influence over the price of a product and the product is unique in its characteristics.

Monopolistic competition is characterized by:

Large number of buyers and sellers

Product