13 Oligopoly and Strategic Behavior

• Many competing businesses can be found next to one another on a busy street.
• In most places a consumer in search of a quick meal has many choices, and more fast- food restaurants appear all the time.
• There is a temptation to see advertising as driving up the price of a product without any benefit to the consumer.
• This misconception does not account for why firms advertise.
• Firms are able to inform their customers about new products and services if they advertise.
• Consumers gain information to help make purchasing decisions.
• Consumers also benefit from added variety, and we all get a product that's pretty close to our vision of a perfect good-- and no other market structure delivers that outcome.

• The benefits and disadvantages of advertising are explored.

• There are many options.

• Some consumers prefer the fries at McDonald's, while others prefer the salad at a different restaurant.
• Each fast food establishment has its own menu items.
• The different products in fast food restaurants give each seller a small degree of market power.

• Firms use product differentiation to differentiate their products.

• Firms use a process to make a product significant.
• Some soup companies are more attractive to potential customers because they specialize in organic soups, which are more important to important customers.

• In terms of the number of sellers, the types of products sold, and the ability of competing firms to enter and exit the market, monopolistic competition falls between competitive markets and monopoly.

• Firms in competitive markets don't have market power.
• Buyers can expect to find low prices and wide availability.
• The availability of a good or service has been restricted by monopolies.
• Firms sell differentiated products in monopolistically competitive markets.
• The competitor has some market power, but not as much as a monopolist.
• Competitive firms have a small amount of market power that allows them to find the most profitable price.

• We begin to understand how monopolistic competition works with a closer look at product differentiation.

• Competitive firms create market power by differentiating their products.
• Style, location, and quality are just some of the ways in which differentiation can occur.

• A trip to a mall is a great way to see the differences between products.
• There are many clothing stores that offer a variety of styles and types of clothing.
• Some stores have styles that appeal to younger customers.
• Business clothing, plus sizes, and sportswear are some of the types of clothing that can be found in clothing stores.

• The store hopes to attract a certain type of customer.

• Many different places to eat can be found in the food court at the mall.
• The price you are willing to pay is what determines where you eat.
• Like most consumers, you will choose the place that gives you what you want while giving you the best value.
• Consumers' differing tastes make it possible for a wide range of food vendors to compete against each other.

• Businesses that are convenient to customers attract customers.
• Customers prefer convenience over price when choosing products and services at gasoline stations, dry cleaners, barber shops, and car washes.
• When consumers prefer to save time and avoid the hassle of shopping for a better deal, a firm with a more convenient location will have some pricing power.
• Producers who sell similar products can generate market power by locating their businesses in areas where customers travel frequently.

• Firms compete on the basis of quality.

• The food at Chipotle is more expensive because it is freshly prepared.
• Consumers enjoy this form of product differentiation.
• Budget conscious consumers can eat at taco bell, while those with a larger budget and a taste for higher quality Mexican food can choose to eat at burrito joint.

• Hollister apple farm does not have a differentiated product to sell because Red Delicious apples are widely available at grocery stores.

• This apple farm is part of a competitive market.

• The brand has some pricing power.
• Hollister is an example of a monopolistic firm.

• It is subject to economies of scale.
• The local water company is a monopolist.

• There is a place between competitive markets which produce an efficient output at low prices and monopoly which produces an inefficient output at high prices.
• When facing monopolistic competition, we consider the outcomes that individual firms can achieve in the short and long run.
• We can compare the long- run equilibrium result with that of competitive markets if we understand how monopolistic competition works.

• A firm that sells a differentiated product has some market power.
• In perfect competition, each firm sells the same product, so competitors' products are perfect replacements, which means that demand is elastic.
• In monopolistic competition, each competitor provides a differentiated product, so competitors' products are imperfect replacements for one another, which means that demand is flatter than monopoly.
• Like a monopolist, the monopolistic competitor uses the profit- maximizing rule to determine the best price to charge and the best quantity to produce.

• Firms are free to enter an industry if they see a potential for profits or if they are making losses.
• Entry and exit regulate how much profit a firm can make.

• You own a fast food restaurant in North Caro lina.
• Your business is making money.
• A Five Guys opens up across the street.
• Some of your customers will switch to Five Guys, while others will still prefer your fare.
• Your profit will be hit.
• Whether or not you stay in business depends on how much you lose.
• To understand how a business owner makes a decision, we need to look at the long- and short-run implications of monopolistic competition.

• The firm makes a profit.
• The same firm incurred a loss after a new competitor opened nearby.

• A single monopolistically competitive firm can make a profit or lose money depending on demand conditions.
• The marginal cost curve and average total cost curve are the same in both panels because we are considering the same firm.
• The location of the demand curve and marginal revenue curve are the only differences.
• The firm can make a profit if the demand is high.
• The firm experiences a loss because there isn't enough demand.

• The calculation establishes the output along the dashed line.
• The best price to charge is determined by following the dashed horizontal line from the demand curve to the vertical axis.

• The firm makes a short- run economic profit if the price is greater than average total cost.
• There is a different situation in panel b.
• The firm experiences a short run economic loss because of P ATC.

• The marginal cost and average total cost curves are the same in both panels because we are considering the same firm.
• The only difference is the location of the demand and marginal revenue curves.
• The firm can make a profit if the demand in panel is high.
• Maybe too many customers have switched to the new Five Guys because there is not enough demand.
• If demand is too low, the firm may not be able to price its product high enough to make a profit.

• Competition will drive economic profit to zero in the long run if firms can easily enter and exit a market.
• You should be familiar with this dynamic from our previous discussions.

• The demand for an individual firm's product will be caused by the larger supply of competing firms.
• It is no longer possible for existing firms to make an economic profit as more firms enter the market.
• A reverse process happens when a market is experiencing a loss.
• Some firms leave the industry.
• The remaining firms experience an increase in demand when consumers have fewer options.
• Firms no longer experience a loss when demand increases.

• The market is shown in Figure 12.2.
• The price is equal to the average total cost of production at the profit- maximizing rate of output.
• There is no reason for firms to enter or exit the industry at this point in the market's evolution.
• In the long run, profits and losses are not possible where entry and exit exist.
• monopolistic competition is similar to a competitive market.

• Firms are earning zero economic profit, as noted by P = ATC along the vertical axis.
• There is no reason for firms to enter or leave the market at this point.

• The firm's success will attract competitors, like Five Guys, to enter the market.
• The short- run profits that Hardee's enjoys will erode as a result.
• Other competitors will be encouraged to enter if profits occur in the short run, while some existing firms will be forced to close.

• Both monopolistic competition and competitive markets drive economic profit to zero in the long run.

• monopolistic competitors have some market power which is important.
• Pricing and output decisions are compared in this section.
• We look at issues of scale and output.

• Competitive firms have market power that allows them to charge more than other firms.

• There are two main differences between a competitive market and monopolistic competition.
• Because P is greater than MC, monopolistic competition produces markup.
• The output in monopolistic competition is smaller than the efficient scale.
• The firm's output is equal to the most efficient scale in a competitive market.

• In a market characterized by monopolistic competition, the price is greater than the marginal cost of making one more unit.
• There is a difference between P and MC.

• When a firm has market power, a mark up is possible.

• The focus should be on bottled water.
• Special packaging is used by other companies.
• Consumers pay more for bottled water because of the higher price.

• The point of tangency in a competitive market is different from the point of tangency in a monopolistic competitor.
• Under monopolistic competition, the point where P + ATC is higher.
• The panel shows the demand curve at ATC's lowest point in a competitive market.
• We can say that a competitive market produces higher prices than a monopolistic one.
• Entry and exit do not guarantee the lowest price, only that the price is equal to the average cost of production.
• The lowest average total cost of production is always the price in a competitive market.
• Under monopolistic competition, this is not the case.
• Cheap food is cheap for a reason.
• There will be no economic profit if firms charge more for better food.

• Average total costs are equal in a competitive market.

• Each firm must set its price equal to the minimum point on the average total cost curve in order to guarantee this result.
• If a corn farmer tried to sell a harvest for more than the market price, he wouldn't get any customers.
• A monopolistic competitor in a food court enjoys market power because some customers prefer its product, which allows food court vendors to charge more than the lowest average total cost.
• The minimum efficient scale is less than the profit- maximizing output.
• Competitive firms can produce more output at a lower cost.
• They would have to lower their prices.
• It is more profitable for a competitor to operate with excess capacity because a lower price decreases the firm's marginal revenue.

• Competition produces a higher price and a lower level of output.
• We looked at efficiency as a way to determine if a firm's decisions are in line with an output level that is beneficial to society.

• The average total costs of a monopolistically competitive firm are higher than those of a firm in a competitive market.
• This result isn't efficient.
• To achieve efficiency, a monopolistic firm could lower its price.
• Perrier's goal is to make a profit, so there is no incentive for the firm to lower its price.

• The second source of inefficiency is the Markup.
• We've seen that for a firm that maximized output at the profit level, P > MC by an amount equal to the markup.
• The consumer's willingness to pay is reflected in the price.
• Consumers would benefit from a reduced price and a decrease in the spread between the price and the marginal cost.
• The output level would benefit the most consumers if the firm did away with the markup.
• This result wouldn't be practical.
• The firm would lose money if the demand curve is below the average total cost curve.
• It is not reasonable to expect a firm to pursue a pricing strategy that will benefit its customers at the expense of its own profit.

• Government regulation could increase efficiency.
• The government regulates monopolists to reduce market power.
• Competitive firms can't make a long- run economic profit like monopolists because they have a limited amount of market power.
• In addition, regulating the prices that firms can charge would put a lot of them out of business.
• We are talking about firms in the fast- food industry.
• Fewer places for consumers to grab a quick bite would be a result of doing away with a significant percentage of these firms.

• A host of problems like those we discussed for monopoly would be created by regulating monopolistic competition through marginal cost pricing.

• The government would need to find a way to subsidize the regulated firms if marginal cost pricing is implemented.
• The inefficiencies present in monopolistic competition do not warrant government action because the only way to fund these subsidies would be higher taxes.

• Products sold under monopolistic competition are more differentiated than those sold in a competitive market and less differentiated than those sold under monopoly.
• Competitive markets where firms sell identical products, have no market power, and face a perfectly elastic demand curve are at one end of the extremes.
• There is a monopolist that sells a unique product without good substitute and faces a steep downward sloping demand curve.

• Two monopolistic competitors are shown in Figure 12.4.

• Product Differentiation, Excess Capacity, and Efficiency Firm A enjoy more.
• It has more capacity and is less efficient as a result.
• Firm B sells a product that is slightly different from its competitors.
• Consumers have weak preferences about which firm to buy from, and demand is elastic.
• There is a small amount of excess capacity and a more efficient result.

• When the firm has an attractive location, style, type, or quality of product that is in high demand among consumers and that competitors cannot easily duplicate, there is a Monopolistic Competition and Advertising level of differentiation.

• H&M is one of the good examples.
• The demand curve is inelastic because consumers have strong brand loyalty for the clothes these firms sell.
• The steep slope of the demand curve means that the point of tangency between the demand curve and the average total cost curve occurs at a high price, which produces a large amount of excess capacity.
• Firm B sells a product that is slightly different from its competitors.
• Three companies that sell discounted clothes are T.J.Maxx, Ross, and Marshalls.

• Weak preferences for a particular firm is something consumers are willing to pay for.

• punch pizza is a small upscale chain that uses wood- fired ovens.

• There is a cultlike following for Punch Pizza in the Twin Cities.
• That loyalty leads to inelastic demand.
• The best Neapolitan Punch Pizza uses wood- fired ovens.

• Pizza Hut has a taste that appeals to a broader group of customers and is located in the middle of the pizza market.
• Pizza Hut's customers are more price sensitive because they can find many other places that serve the same product.

• The marginal cost of making pizza at both places is the dough, the topping, and the wages for labor.
• Pizza Hut has a streamlined pizza assembly.
• The marginal cost of Punch Pizza is relatively low.
• The prices at Pizza Hut are lower than at Punch Pizza.

• The difference between the price charged and the marginal cost of production is greater at Punch Pizza than at Pizza Hut.

• The relatively flat nature of the demand curve means that the point of tangency between demand and average total cost can be found at a relatively low price.

• Competition leads to more choice and variety for consumers.
• Reducing inefficiency by lowering the prices that monopolistically competitive firms can charge will have the consequence of limiting the product variety in the market.
• It sounds like a small price to pay for increased efficiency.
• Imagine a world without clothes.
• Consumers want to express their individuality is one of the reasons fashions go out of style.

• Consumers are willing to pay more for variety in order to look different from everyone else.

• Advertising is part of daily life.
• It's a cost of doing business in many industries because it's a means by which companies compete.

• All of the advertising spots are aired during the Super Bowl.

• The top-rated Super Bowl commercial of 2015 was created by Anheuser- Busch.

• There are sectors of the economy that are doing well.
• Firms that advertise during the Super Bowl build brand recognition and competition.

• About 1% of global economic activity is spent on advertising.
• In absolute terms, worldwide advertising costs are over half a trillion dollars a year.
• The answer is a little of both in this section.

• The goal of advertising is to drive additional demand for the product being sold.
• A variety of techniques are used in advertising campaigns.
• An important piece of information about the product is highlighted in advertising.

• The table shows how the process works.
• FedEx's slogan is "When it absolutely, positively has to be there overnight."
• FedEx has differentiated itself from its competitors and some customers are willing to pay a premium for overnight delivery.

• A successful advertising campaign will change the demand curve in two ways: it will shift the demand curve to the right and change its shape.

• This change can be seen in Figure 12.5.
• The demand curve shifts to the right in response to the advertising.

• The demand curve becomes more inelastic.

• The change in shape is due to the fact that advertising highlights features that make the product attractive to specific customers who are more likely to want it.
• The firm can raise its price because demand is inelastic after advertising.

• Information that consumers may find helpful in matching their preferences is conveyed in advertising.
• Advertising tells us about the price, location, and introduction of new products.
• Firms use advertising to underprice one another.
• Firms that run expensive advertising campaigns invest a lot in their product.
• It is highly unlikely that a firm would spend a lot of money on advertising if they didn't think the process would work.
• A rational consumer can see that firms spending a lot of money on advertising are more likely to have a better product than a competitor.

• Advertising isn't as productive in all market structures.
• The markets that function under monopolistic competition invest the most in advertising.

• What happens here stays here.
• Travelers will have a better vacation than anywhere else according to the slogan.

• The emphasis on quality and performance appeals to buyers.

• Betcha can't only eat one.

• The message that one potato chip is not enough to satisfy your craving appeals to chip buyers who choose better taste over cheaper generics.

• Widespread acceptance is one of the main reasons for carrying a credit card.

• Advertising informs consumers about differences that they care about, which makes the demand curve more inelastic.
• The demand curve for the firm's product is more vertical after advertising because consumers want the good more intensely.

• Competitive firms sell nearly identical products at the same price.
• Advertising raises a firm's costs without directly influencing its sales.
• Advertising for a good that is undifferentiated functions like a public good for the industry as a whole: the benefits flow to every firm in the market through increased market demand for the product.
• Consumers can find the product at many competing locations at the same price because each firm sells essentially the same good.

• An individual firm that advertises in this market is at a competitive disadvantage because it will have higher costs that it can't pass on to the consumer.

• This doesn't mean that we don't see advertising in competitive mar kets.
• Although individual firms do not benefit from advertising, competitive industries as a whole can.
• The campaign began in 1992 and has been credited with increasing the demand for beef products.
• The National Cattlemen's Beef Association puts millions of dollars into advertising each year.

• This is an example of how firms should think about the consequences of losing market share beyond their advertising budgets.
• Mars didn't protect its position in the market.

• Firms with differentiated products are more likely to advertise under monopolistic competition.
• The advertising behavior of pizza companies is being looked at.
• National pizza chains such as Domino's, Pizza Hut, Papa John's, and Little Caesars have commercials on television.
• Each firm's advertising increases demand for its product because it is slightly different.
• The gains from advertising go to the firm.
• A strong incentive to advertise to gain new customers is generated by these benefits.
• Advertising becomes the norm among monopolistically competitive firms because each firm feels the same way.

• The Super Bowl commercials are watched as much as the football game.
• Fans love these ads.
• There are different reasons why economists pay close attention.

• There have been thirteen recent Super Bowls.

When a brand is able to achieve product differentiation through advertising, what happens to the demand curve?

• Coca-Cola and Pepsi are considered to be oligopolists rather than monopolistic ing from the perspective of both the brand competitors.
• In the next chapter, we'll discuss oligopoly.

• brick- and- mortar retailers include Sears, Penney's, and The Gap.

• Depending on how old you are, you probably spent a lot of time in one of these stores.
• The growth and viability of The Gap and Kohl's appears to be back on track.
• It could also make it, too.
• It looks like Sears might be in a death spiral after posting three straight years of losses.

• Sears credit card was as important as American Express a few generations ago.
• The Sears catalog was the first to allow non- city dwellers access to products previously only available in cities.

• Since the mid-2000s, bad manage ment and online giant Amazon have had major impacts.
• Sears lost business in the early 1990s.
• The rapid rise of Walmart gave consumers lower prices because of its sophisticated inventory control.
• Sears lost focus on its main retail business because it diversified into many areas.
• Because of the way Sears had expanded, its cost structure was higher than Walmart's, so it had to become more efficient to survive.

• You never know where your most fierce competitor will emerge from, and a busi ness must never take its success for granted.

• That's where Walmart started.

• A unique product is sold by the monopolist.
• The monopolist is less likely to advertise than a monopolistic competitor because consumers have few good alternatives to choose from.

• Firms don't have to advertise to get business when consumer choice is limited.
• The lack of a competitive aspect means there is no need to advertise to keep consumers from changing products.
• That doesn't mean that the monopolist doesn't advertise.

• The monopolist might want to advertise to inform the consumer about its product.
• If the gains from advertising are enough to cover the cost of advertising, this strategy can be beneficial.
• Most of the world's supply of rough- cut diamonds is controlled by De Beers.
• The company doesn't need to advertise in order to fend off competitors, but it does want to create more demand for diamonds.
• The "A diamond is forever" campaign was created by De Beers.

• There are benefits and drawbacks to advertising.
• Advertising raises costs and can be dishonest.

• The firm's average total cost curve shows advertising costs.
• When a firm advertises, it hopes to increase demand for the product and sell more units at a higher quantity.
• The firm will enjoy economies of scale if it can sell enough additional units.
• The return on advertising investment looks good.

• Under monopo listic competition, each firm is competing with many other firms selling somewhat different products.
• Rival firms will use their own advertising.

• Advertising is the norm in monopolistic competition.
• Competitive advertising is used by each firm to win new customers.
• The impact on each firm's demand is largely canceled out.
• Costs rise from ATC1 to ATC3 on the higher curve, but demand may stay the same in the first quarter.
• Higher costs are created by advertis ing.

• Advertising raises costs for the producer.
• It raises prices for consumers.

• The advertising efforts of monopolistically competitive firms cancel each other out.

• A nice gift is pearl ear studs.

• Brand loyalty can mean higher prices.
• An example can be looked at.

• You could buy all your jewelry at Tiffany's.
• You go to the store one day and pick up pearl ear studs.
• Tiffany's sells a small pair of pearl studs for $300.
• You can get studs of the same size, quality, and origin at Pearl World for $43, and you can find them online at Amazon for $19.

• Buying ear studs is like consuming many other goods because name recognition is important.

• The staff dress, how the jewelry is packaged, and the storefront are some of the things jewelry buyers look at.
• A lot of money is spent for the privilege of getting Tiffany's blue box.
• Consumers think Tiffany's jewelry is better when all the store is doing is charging more.

• The graph is for DiGiorno.

• The graph shows the generic pizza.

• "It's not delivery" is the slogan of DiGiorno.
• The product is just as good as a freshly delivered pizza.
• Some customers who buy frozen pizzas will opt for DiGiorno over comparable generics because they are familiar with the company's advertising claim about its quality.
• DiGiorno has an incentive to make sure the product is delivered.
• The customer doesn't have high expectations about the quality of the brands because they are purchased mostly on the basis of price.

• Advertising campaigns are designed to produce a psychological response.
• When an ad moves you to act in a certain way, it becomes manipulative.
• There is a temptation to lie about a product because of the power of advertising.
• The FTC regulates advertising and promotes economic efficiency in order to prevent firms from spreading misinformation.
• The Division of Advertising Practices at the FTC protects consumers.

• The commission doesn't have enough resources to track down every violation, but it does pay attention to claims involving food, nonprescription drugs, alcohol, and tobacco.
• Unsubstantiated claims are very popular on the Internet, and they tend to target vulnerable populations seeking quick fixes to medical conditions.

• Even with regulatory oversight, consumers must still be vigi lant.
• The FTC can remove products from the market, but can't fine companies that make false claims.
• The damage is already done.

• Kevin Trudeau was a staple of infomercials for over a decade.
• Trudeau writes books about simple cures for medical conditions.
• He is a smooth talker.
• Trudeau and a good looking woman are having a conversation about the product in the infomercial.
• Trudeau's claims are often not true.

• The FTC had taken Trudeau to task before.
• In 1998, the commission filed a lawsuit against him, accusing him of making false and misleading claims about his products that he claimed could cause significant weight loss, cure drug addictions, and improve memory.

• Product differentiation is important in markets where franchises are valuable.

• Customers who prefer a certain type and quality of food know that the dining experience at each McDonald's will be the same.

• This guarantee can be used to set up a bank of big- screen TVs.
• The franchise owner has the exclusive right to sell failures in the restaurant industry.
• There is a ferentiated product in the area.

• Suppose you want to open a restaurant.

• You can purchase a franchise ing plan and locate anywhere you want.
• If more potential customers notice your Golden Corral and Buffalo Wild Wings are two restaurants, that will drive up revenues.
• Golden Corral is the largest buffet- style do $1 million in annual sales as part of a franchise, and Buffalo Wild Wings is only half a million on your own.
• One of the top places to watch sporting events.
• It would make more sense to avoid revenue if you could open your own buffet profits, as a healthy chunk of it will turn into franchising costs.
• This is what franchising is all about.

• The misconception that advertising increases the price of goods and services without adding value for the consumer was discussed in this chapter.
• Advertising does cost money, but that doesn't mean it's harmful.

• Advertising can increase demand, build brand loyalty, and give consumers useful information about different products.

• Monopolists can earn an economic profit in the long run if their business is free of barriers to entry.

• Monopolistic competitors fail to maximize output for society.
• The entire story is not told by this observation.
• Monopolists have more market power and create more excess capacity.
• The competitor lacks the ability to exploit consumers.

• The result is not perfect, but it serves consumers and society well.

• Competition is characterized by free entry and many firms selling differentiated products.

• Differentiation of products can be done by style or type, location or quality.

• Monopolists are price makers that have downward sloping demand curves.
• The firm can mark up the price above marginal cost when the demand curve is downward.
• Excess capacity and an inefficient level of output are the results.

• Barriers to entry allow a monopoly to make a profit.
• This isn't the case for competitive markets.

• Under monopolistic competition, advertising gives information about the price of goods, the location of products, and new products.
• It shows differences in quality.
• It is harder for other businesses to enter the market when advertising encourages brand loyalty.

• Advertising can be deceptive.

• There are three long runs.

• monopolistic competition is inefficient.

• Consider two different companies.

• Take that competition into account.

• There is a price and a markup for Titleist.

• The price and put for the generic firms are shown in a separate graph.

• There is a restaurant in a small town.
• The owner of the restaurant marks up his food.

• Generic golf can help explain why retail customers pay so much.

• The florist business has more purchases of books and other items.
• Firms are free to enter the store.
• At any time, the bookstore has a market and exit.
• Firms will enter because of power.
• It pays to your friend's shop to advertise.
• A firm makes cardboard.
• When florist shops open, the added product will cause prices to go down, causing producers to lose market power, and your friend's profits to go down.
• He won't be able to make more money than his rivals because advertising expenses will only make their cost.

• That isn't come from the Italian company to say that they won't be able to save enough for ottica.
• The major retail firms won't be able to sail around the world as he would like because other firms will their brands if they do.
• If you don't enter the market and limit his profits, you should care about the brand of eyeglasses that you forward.

• The cardboard firm makes a product.
• Online retailers aren't selling a brand, so that is a component used mostly by other, and they attract customers with much more elastic firms that need to package final products for demand compared with customers who want sale.
• Any attempts at advertising will make their frames fashionable.
• This scenario only raises costs without increasing demand.
• This situation is different from brand loyal customers, who are more likely to buy from a bookseller who advertises to attract higher prices than firms with customers who don't shop at the store.
• Care about the brand is a result of more traffic.