Monopolistic Competition and Oligopoly

Market Structures

Most real markets lie between perfect competition and monopoly. Monopolistic competition features many firms selling slightly differentiated products, giving them downward-sloping demand and some market power.

With free entry, short-run profits attract new firms until demand shifts left. In the long run, $P = AC$ at a point of zero economic profit.

Because production stops left of $AC_{\min}$, firms operate with excess capacity in the long run.

Strategic Oligopoly

Oligopoly involves a few large firms whose decisions interact strategically. In a Cournot duopoly, two firms simultaneously choose quantities using a reaction function:

$q_1^*(q_2) = \frac{a - c}{2b} - \frac{q_2}{2}$

The Nash equilibrium is where reaction functions intersect.

Bertrand competition has firms compete on price. Stackelberg features a leader. Cartels restrict output, inviting cheating.

HHI sums squared market shares to measure power.