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5: Monopolistic Competition and Oligopoly

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    • 5.1: Market Structures
      Perfect competition is on one end of the market structure spectrum, with numerous firms. Monopoly is the other extreme of the market structure spectrum, with a single firm. Monopolies have monopoly power, or the ability to change the price of the good. Monopoly power is also called market power, and is measured by the Lerner Index. This chapter defines and describes two intermediary market structures: monopolistic competition and oligopoly.
    • 5.2: Monopolistic Competition
      Monopolistic competition is a market structure defined by free entry and exit, like competition, and differentiated products, like monopoly. Differentiated products provide each firm with some market power. Advertising and marketing of each individual product provide uniqueness that causes the demand curve of each good to be downward sloping. Free entry indicates that each firm competes with other firms and profits are equal to zero on long run equilibrium.
    • 5.3: Oligopoly Models
      Oligopoly is a market structure with few firms and barriers to entry. There is often a high level of competition between firms, as each firm makes decisions on prices, quantities, and advertising to maximize profits. Since there are a small number of firms in an oligopoly, each firm’s profit level depends not only on the firm’s own decisions, but also on the decisions of the other firms in the oligopolistic industry.
    • 5.4: Oligopoly, Collusion, and Game Theory
      Collusion occurs when oligopoly firms make joint decisions, and act as if they were a single firm. Collusion requires an agreement, either explicit or implicit, between cooperating firms to restrict output and achieve the monopoly price. This causes the firms to be interdependent, as the profit levels of each firm depend on the firm’s own decisions and the decisions of all other firms in the industry. This strategic interdependence is the foundation of game theory.


    5: Monopolistic Competition and Oligopoly is shared under a CC BY-NC license and was authored, remixed, and/or curated by Andrew Barkley (New Prairie Press/Kansas State University Libraries) .

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