Exam 13: Monopolistic Competition and Oligopoly

Kinked Demand. VoIP Telephone, Inc., provides local and long distance telephone service in the Toledo, Ohio market. The company faces the following segmented demand and marginal revenue curves for its service: Over the range of 0 to 25(000) customers per month: When output exceeds 25(000) customers per month: The company's total and marginal cost functions are as follows: where P is price (in dollars), Q is output (in thousands), and TC is total cost (in thousands of dollars).

In both monopolistic competition and oligopoly markets:

A perfectly functioning cartel results in:

Firm Supply. Common Electric Products, Inc., and Lighthouse Manufacturing, Inc., are domestic suppliers of halogen gas light bulbs used in roadside lamps. Given the vigor of domestic and foreign competition, P = MR in this market. Marginal cost relations for each firm are: where Q is output in units, and MC > AVC for each firm.

For a firm in monopolistically competitive market equilibrium:

The four-firm concentration ratio will rise following:

Firm Supply. Iota Facsimile Products, Ltd., and JustheFax, Inc. are domestic suppliers of moderately-priced facsimile machines. Given the vigor of domestic and foreign competition, P = MR in this market. Marginal cost relations for each firm are: where Q is output in units, and MC > AVC for each firm.

The kinked demand curve theory of oligopoly assumes that rival firms:

The demand curve faced by a firm in a monopolistically competitive industry is:

In oligopoly equilibrium:

Monopolistic Competition. Merck & Co. markets a product called ZOCOR that treats people who suffer from high cholesterol and heart disease. ZOCOR works by reducing the amount of cholesterol in your blood. ZOCOR can dramatically lower LDL ("bad") responsible for depositing cholesterol in artery walls and elevate HDL ("good") cholesterol, which helps return LDL cholesterol to the bloodstream, thus preventing buildup of cholesterol in the artery walls. Elevated LDL cholesterol is associated with a greater risk of heart disease, and heart disease is the leading cause of death for people in the United States.

Cartel Pricing. An illegal cartel has been formed by three leading ready-mix cement suppliers in the local market. Total costs at various levels of service per day are as follows:

Cartel Pricing. An illegal cartel has been formed by three leading on-site tractor trailer fleet washing service companies in Harrisburg, Pennsylvania. Total costs at various levels of service per day are as follows:

Price/Output Equilibrium. Dentists market a variety of tooth whitening products and services to a growing market of aging baby boomers. Until recently, tooth whitening services provided by dentists were a relatively small but highly profitable niche in the dental services market. Now, the position of dentists in the tooth whitening services market is threatened by a host of new product introductions by leading suppliers of toothpaste and mouth wash products.

An formal agreement to set prices and output is called:

Monopolistic competition always entails:

Price/Output Equilibrium. Suppose Target Stores, Inc., sell RainAway, an innovative product with polymers used to coat the windshields of cars, planes, and boats. RainAway makes windshields and other such surfaces slick enough for rain to slide off easily. In the case of windshields, RainAway makes it possible to avoid the use of windshield wiper blades except during the most torrential downpours. During recent years, RainAway has used its unique windshield coating product to successfully exploited a small but profitable niche in the market. However, RainAway's monopoly position in this market niche is now threatened by a competitor's announcement of a new product with capabilities similar to those of the RainAway product.

When prices in monopolistically competitive markets exceed those in a perfectly competitive equilibrium, this difference is the cost of:

Cartel Pricing. The optical fiber manufacturing industry is highly concentrated with only three active firms. Annual output and the marginal cost of production for each company are as follows: Competition from lower-priced imports has been effectively limited by import tariffs (taxes). Given this import protection, domestic firms are able to sell as much output as they wish at the current wholesale market price of $2,000. However, industry prices haven't risen above $2,000 because this price triggers a flood of foreign competition.

In a monopolistically competitive industry, firms: