CHAPTER 34
Monopolistic Competition and Oligopoly
LEARNING OBJECTIVES
Explain how oligopolies and monopolistic competition differ from competitive markets.
Understand how brands create a monopoly for a product in monopolistic competition.
OUTLINE OF CHAPTER
I. Monopolistic Competition
II. Oligopoly
KEY TERMS
cartel
a group of firms that acts as a monopoly
monopolistic competition
exists in an industry composed of many small firms, each producing a slightly differentiated
exists when a few business firms dominate an industry
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Explain how oligopolies and monopolistic competition differ from competitive markets.
1. What conditions for a perfectly competitive market are violated by oligopolies?
Monopolistic competition?
2. Compare and contrast oligopolies and monopolistic competition. What is an advantage
for a firm operating in each market structure? Disadvantage?
Monopolistic competition is based on product differentiation. Advantage attaches to
Understand how brands create a monopoly for a product in monopolistic competition.
3. Describe how brand names are legally protected. How does this resemble a monopoly?
4. Explain how product differentiation leads to competing brands.
firms.
Explain why advertising is so important to firms in monopolistically competitive markets.
5. Explain the link of advertising and brand names (product differentiation) in maintaining
6. Demonstrate graphically what happens to profits if more advertising results in more
consumers. Now demonstrate what happens to profit if more advertising raises the costs
to the firm.
More consumers means the demand curve will shift out and increase profits. Increased
Explain why pricing and output decisions of firms in oligopolistic markets are so different
from firms in all the other markets.
7. Explain why pricing decisions of a firm in an oligopolistic market depend on decisions
of other firms. How is this different from decisions of firms in perfectly competitive
markets?
Raising prices will be effective only if rivals also raise prices. Lowering prices will be
8. Compare and contrast explicit and implicit collusion. What are examples of pricing
models for explicit and implicit collusion? Explain.
Direct or explicit collusion between businesses in the U.S. is illegal. It is not illegal in