Revision: Microeconomic Theory >> Price Output Determination Under Monopolistic Competition and Oligopoly Economics ISC (Commerce) Class 12 CISCE

"If a market is not organised, if contact between buyers and sellers is established with great difficulty and they are not in a position to compare the goods and the prices paid, then we face a situation of imperfect competition." — Fairchild

"Monopolistic Competition is found in the industry where there is a large number of small sellers, selling differentiated but close substitute products." – J.S. Bain

• “Selling costs are costs incurred in order to alter the position or shape of the demand curve for the product.” — E.H. Chamberlin
• “Selling costs include all expenses incurred to increase the demand for the goods.” — Robert Awh

“Production costs create utilities in order that demands may be satisfied while selling costs create and shift the demand curves themselves.” — E.H. Chamberlin

• “Oligopoly is that situation in which a firm bases its market policy in part on the expected behaviour of a few close rivals.”
  — J. Stigler
• “An oligopoly is a market of only a few sellers, offering either homogeneous or differentiated products. There are so few sellers that they recognise their mutual dependence.” — P.C. Dooley

Q + (n + 1)
where  Q = market size and n = number of sellers.

• Imperfect competition is more common in the real world than perfect competition.
• It occurs when at least one condition of perfect competition fails (e.g., product differentiation, entry barriers, imperfect information).
• It includes monopoly, monopolistic competition, oligopoly, and duopoly as major forms.
• Firms often have some power to set prices, unlike in perfect competition, where firms are price takers.​

• Sellers compete mainly through product features and branding, not by price alone.
• No single seller can dominate the market or set global prices.
• Customers benefit from choice but may pay more for features created through branding.

• Under monopolistic competition, firms sell differentiated products, so price and output are determined by each firm’s own demand and cost conditions.
• In the short run, a firm is in equilibrium where MR = MC and may earn super-normal profits, normal profits, or incur losses.
• In the long run, entry and exit of firms take place.
• Due to competition, firms earn only normal profits, where AR is tangent to LAC at equilibrium.

• What: Ads/sales expenses to shift demand right in monopolistic competition/oligopoly.
• Vs Production: Selling creates demand; production meets it (e.g., ads vs factory).
• ASC Curve: U-shaped—falls then rises per unit.
• Effect: Boosts AR, profits until marginal ad revenue = ad cost.
• Nature: Uncertain, ongoing, rival-dependent.

• Oligopoly: A market with a few dominant firms, high interdependence, and barriers to entry.
• Firms compete both by price and by non‑price methods (advertising, quality, branding).
• Price rigidity and non‑price competition are typical features of oligopolistic markets.

• Under oligopoly, price determination is uncertain due to interdependence of firms.
• Independent pricing may lead to price war or price rigidity (homogeneous products) or profit-maximising prices (differentiated products).
• Collusive pricing occurs when firms form a cartel and fix price and output jointly, though it is often unstable.
• Price leadership occurs when one firm fixes the price and others follow (barometric, dominant, aggressive, or effective), but it may fail due to cost differences, new firms, or lack of agreement.

• Sweezy explained price rigidity in oligopoly using the kinked demand curve.
• If a firm cuts price, rivals follow → demand becomes inelastic; if it raises price, rivals do not follow → demand becomes elastic.
• Due to the kink, the MR curve has a gap, so changes in cost or demand do not change price easily.
• Hence, firms prefer to stick to the prevailing price, leading to price stability in oligopoly markets.

• In collusive oligopoly, firms enter into agreements or form cartels to avoid price wars and maximise profits.
• Firms fix a common price and compete through non-price methods like advertising, product quality, and design.
• Collusion reduces uncertainty and rivalry arising from interdependence among firms.
• Cartels aim to ensure profit for all member firms, though they may differ in costs and market strategies.

• Mergers mean combining two or more independent firms into a single firm to reduce competition and increase efficiency.
• Firms merge due to technological changes, global competition, deregulation, and the need to cut costs.
• Types of mergers:
  Horizontal – firms producing the same product merge.
  Vertical – firms at different stages of production merge (upstream or downstream).
  Conglomerate – firms from unrelated businesses merge.