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Introductory Economics
LECTURE 7B
IMPERFECT COMPETITION:
MONOPOLISTIC COMPETITION AND OLIGOPOLY
READING:
SLOMAN AND GARRATT, CHAPTER 5
Learning Objectives
After this lecture, you should be able to:
Collusive oligopoly
Formal collusion
Tacit collusion
Non-collusive (or competitive) oligopoly
Monopolistic Competition
Reading:
Sloman and Garratt,
Chapter 5, p.114-115
Differentiated products
Product attributes
Different services
Location
Brand names and packaging
Price maker
Advertising
Establishing trademarks and brand names
Oligopoly
Reading:
Sloman and Garratt,
Chapter 5, pp.117-119; 122
Introducing an Oligopoly
Oligopoly refers to a market dominated by a few
large producers.
Because of small number of producers, oligopolistic
firms tend to have considerable market power.
Examples of oligopolistic industries:
Aircraft manufacturing
Car manufacturing
Banking and financial services
Oil production
Firms can determine and adjust their own price and output to
maximise profit.
However, in doing so firms may need to consider the strategic
behaviour of other rivals.
There is mutual interdependence, since the each firms profit
depends on both its own and other rivals commercial
strategies.
Economies of scale
Ownership and control over key resources
Preemptive and retaliatory pricing
Advertising strategies
Collusive Oligopoly
As firms are mutually interdependent, they may wish
Price
Industry D = AR
Industry MR
Qmax
Quantity
production at Qmax is
divided among firms.