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Monopolistic Competition and Oligopoly

Learning Objectives


  1. List the four distinguishing characteristics of monopolistic competition.

  2. Demonstrate graphically the equilibrium of a monopolistic competitor.

  3. State the central element of oligopoly.

  4. Explain why decisions in the cartel model depend on market share and decisions in the contestable market model depend on barriers to entry.

  5. Describe two empirical methods of determining market structure.

Chapter Summary

Monopolistic competition and oligopoly are market environments between the two extremes of perfect competition and monopoly. Monopolistic competition is characterized by many sellers, firms selling a differentiated product, multiple dimensions of competition, and easy entry of new firms in the long run. It is this easy entry of new firms that reduces the possibility of long-run profit for monopolistically competitive firms. Most real world markets are monopolistically competitive.

The central element of oligopoly is that there are few firms in the industry. Any decision a firm makes must take into account the expected reaction of other firms. Oligopolies can be collusive or non-collusive. Two informal models of oligopoly behavior presented in this chapter are the cartel model and the contestable market model.

To make claims about market structure in real-world markets, economists use a number of empirical estimates, like concentration ratios and the Herfindahl index.

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