4.5 — Imperfect Competition: Monopolistic Competition & Oligopoly — Class Content



Today we finally return to finish our tour of industrial organization, i.e. the types of markets by competitiveness.

We first cover monopolistic competition, a much more realistic model of most firms in the real world, where firms have some market power, but are not the only producer in their industry. To model them, we blend elements of monopoly with elements of perfect competition. In the short-run, we model the firm as a monopoly acting like any monopolist would, but in the long run, there is free entry and exit, so other entrants reduce the demand for any one firm’s product (and make it more elastic) so that firms’ economic profits go to zero.

We finally cover oligopoly, where there are a small number of firms with market power that interact strategically. While some industries in the real world are indeed dominated by a small number of firms, this type of model is applicable well beyond industries with a small number of firms, as to understand the strategic nature of firm decisions, we introduce game theory into our models.




You are done with graded homeworks for the semester! However, homework 6 is available for you to practice the topics of Unit 4 for the final exam.

Turn in Exam 1 and Exam 2 corrections by the last day of class.

Don’t forget your Op-Ed is due by Friday May 14.