Monopoly , Oligopoly and

Monopolistic Competition

1
2
Framework for Competition Analysis
Policy context and market environment:

Govt Policy on Competition  

Degree of govt ownership

Regulation

Trade policy

Size of domestic market

Vested interests

Technological Innovations

Competition authority
3
 Framework contd…
Degree of competition:

Number of market players

Market concentration

Profitability

Entry and exit

Anti-competitive practices

Changes in market share (Brand Switching)

4
 Framework contd…
Market outcomes:

Price

Competitiveness

Exports

Access to services

Innovation

Domestic vs. foreign producers

Productivity Improvement
5
 A monopoly is a firm that is the sole seller of a
product without close substitutes.
 A monopoly firm has market power, the ability
to influence the market price of the product it
sells. A competitive firm has no market power.

6
 Why Monopolies Arise
The main cause of monopolies is barriers
to entry – other firms cannot enter the market.
Four sources of barriers to entry:
1. A single firm owns a key resource.
E.g., DeBeers owns most of the world’s
diamond mines
2. The govt gives a single firm the exclusive right
to produce the good.
E.g., Indian Railways

7
 Why Monopolies Arise
3. Natural monopoly: a single firm can produce
the entire market Q at lower ATC than could
several firms. Eg: Utilities
4. Coercive Monopoly: prohibits competitors from
entering the field: DeBeers controlled the
distribution channel till 2000 along with hoarding
to remove competition., Microsoft tying in of
Internet Explorer with OS

8
 Natural monopoly:

Example: 1000 homes need electricity.

Cost Electricity
Economies of
ATC is lower if scale due to
one firm services huge FC
all 1000 homes `80
than if two firms `50 ATC
each service
Q
500 homes. 500 1000
9
Monopoly vs. Competition: Demand Curves
In a competitive market,
the market demand curve
slopes downward.
A competitive firm’s
but the demand curve demand curve
for any individual firm’s P
product is horizontal
at the market price.
The firm can increase Q D
without lowering P,
so MR = P for the
competitive firm. Q

10
Monopoly vs. Competition: Demand Curves

A monopolist is the only

seller, so it faces the
market demand curve.
A monopolist’s
To sell a larger Q, demand curve
P
the firm must reduce P.
Thus, MR ≠ P.

D
Q

11
 Understanding the Monopolist’s MR
 Increasing Q has two effects on revenue:
• The output effect:
More output is sold, which raises revenue
• The price effect:
The price falls, which lowers revenue
 To sell a larger Q, the monopolist must reduce the
price on all the units it sells.
 Hence, MR < P
 MR could even be negative if the price effect
exceeds the output effect

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 Profit-Maximization
 Like a competitive firm, a monopolist maximizes
profit by producing the quantity where MR = MC.
 Once the monopolist identifies this quantity,
it sets the highest price consumers are willing to
pay for that quantity.
 It finds this price from the D curve.

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 Profit-Maximization

Costs and
1. The profit- Revenue MC
maximizing Q
is where P
MR = MC.
2. Find P from
the demand D
curve at this Q. MR

Q Quantity

Profit-maximizing output
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 The Monopolist’s Profit

Costs and
Revenue MC

As with a P
ATC
competitive firm, ATC
the monopolist’s
profit equals D
(P – ATC) x Q MR

Q Quantity

15
A Monopoly Does Not Have an S Curve
A competitive firm
 takes P as given
 has a supply curve that shows how its Q depends
on P
A monopoly firm
 is a “price-maker,” not a “price-taker”
 Q does not depend on P;
rather, Q and P are jointly determined by
MC, MR, and the demand curve.
So there is no supply curve for monopoly.
16
 Monopoly Drugs vs. Generic Drugs

Patents on new drugs The market for

Price a typical drug
give a temporary
monopoly to the seller.
When the PM
patent expires,
the market PC = MC
becomes competitive, D
generics appear.
MR

QM Quantity
QC

17
 The Welfare Cost of Monopoly
 Recall: In a competitive market equilibrium,
P = MC and total surplus is maximized.
 In the monopoly eq’m, P > MR = MC
• The value to buyers of an additional unit (P)
exceeds the cost of the resources needed to
produce that unit (MC).
• The monopoly Q is too low –
could increase total surplus with a larger Q.
• Thus, monopoly results in a deadweight loss or
allocative inefficiency.

18
 The Welfare Cost of Monopoly

Competitive eq’m:
Price Deadweight
quantity = QE MC
P = MC loss
total surplus is P
P = MC
maximized
MC
Monopoly eq’m:
D
quantity = QM
P > MC MR

QM QE Quantity

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 Price Discrimination
 Price discrimination is the business practice of
selling the same good at different prices to
different buyers.
 The characteristic used in price discrimination
is willingness to pay (WTP):
• A firm can increase profit by charging a higher
price to buyers with higher WTP.

20
 Perfect Price Discrimination vs.
Single Price Monopoly
Here, the monopolist Consumer
Price
charges the same surplus
price (PM) to all Deadweight
buyers. PM
loss
A deadweight loss
results. MC
Monopoly
profit D
MR

QM Quantity

21
 Perfect Price Discrimination vs.
Single Price Monopoly
Here, the monopolist
produces the Price
Monopoly
competitive quantity,
profit
but charges each
buyer his or her WTP.
This is called perfect
MC
price discrimination.
D
The monopolist
captures all CS MR
as profit.
Quantity
But there’s no DWL. Q
22
 Price Discrimination in the Real World
 In the real world, perfect price discrimination is
not possible:
• no firm knows every buyer’s WTP
• buyers do not announce it to sellers
 So, firms divide customers into groups
based on some observable trait
that is likely related to WTP, such as age.
Market Segmentation

23
 Observations
 In the real world, pure monopoly is rare.
 Yet, many firms have market power, due to
• selling a unique variety of a product
• having a large market share and few significant
competitors
 In many such cases, most of the ideas we have
seen here apply, including
• markup of price over marginal cost
• deadweight loss

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 Between Monopoly and Competition

Two extremes
• Competitive markets: many firms, identical
products
• Monopoly: one firm
In between these extremes
• Oligopoly: only a few sellers offer similar or
identical products.
• Monopolistic competition: many firms sell
similar but not identical products.

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 Measuring Market Concentration
 Concentration ratio: the percentage of the
market’s total output supplied by its four largest
firms ( or eight firms)
 The higher the concentration ratio, lesser the
competition. Tentatively we can say:
0 % - Perfect competition
100 % - Oligopoly to Monopoly
0 – 50 % – Monopolistic competition or Oligopoly
50 – 80 % - Oligopoly
 An alternative method is HHI or Herfindahl Hirschman Index
26
 Industry >> General >> FactSheet
Industry - Steel - Large
Year End Sales Share Cum
1 SAIL 201003 40,520.24 30.33245 30
2 Tata Steel 201003 24,940.85 18.6701 49
3 JSW Steel 201003 18,202.48 13.62593 63
4 Ispat Inds. 201006 10,132.73 7.585111 70
5 Jindal Saw 201003 6,777.46 5.073439 75
6 JSL Stain. 201003 5,721.23 4.282771 80
7 Bhushan Steel 201003 5,611.27 4.200458 84
8 Uttam Galva 201003 4,495.66 3.36534 87
9 Lloyd Steel Inds 201003 2,898.72 2.16991 89
10 Natl. Steel&Agro 201003 2,232.10 1.670895 91
11 Ramsarup Inds. 201003 2,056.95 1.539782 93
12 Mukand 201003 1,962.95 1.469416 94
13 Usha Martin 201003 1,850.39 1.385156 95
14 Surya Roshni 201003 1,777.90 1.330892 97
15 Sunflag Iron 201003 1,348.06 1.009124 98
16 ISMT 201003 1,193.27 0.893252 99
17 MUS C O 201003 1,086.77 0.813529 99
18 Shah Alloys 201003 778.07 0.582444 100
133,587.10 100

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 EXAMPLE: Cell Phone Duopoly in Smalltown

P Q  Smalltown has 140 residents

`0 140
 The “good”:
5 130
cell phone service with unlimited
10 120 anytime minutes and free phone
15 110
20 100
 Smalltown’s demand schedule
25 90  Two firms: Cingular, bRural
30 80 (duopoly: an oligopoly with two firms)
35 70  Each firm’s costs: FC = `0, MC = `10
40 60
45 50

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 EXAMPLE: Cell Phone Duopoly in Smalltown

P Q Revenue Cost Profit Competitive

Competitive
`0 140 `0 `1,400 –1,400 outcome:
outcome:
5 130 650 1,300 –650 P MC == ``10
P == MC 10
Q
Q == 120
120
10 120 1,200 1,200 0
15 110 1,650 1,100 550 Profit == ``00
Profit

20 100 2,000 1,000 1,000

25 90 2,250 900 1,350 Monopoly
Monopoly
30 80 2,400 800 1,600 outcome:
outcome:
35 70 2,450 700 1,750 PP == ``40
40
40 60 2,400 600 1,800 Q
Q == 6060
45 50 2,250 500 1,750 Profit == ``1,800
Profit 1,800
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EXAMPLE: Cell Phone Duopoly in Smalltown

 One possible duopoly outcome: collusion

 Collusion: an agreement among firms in a
market about quantities to produce or prices to
charge
 Cingular and bRural could agree to each produce
half of the monopoly output:
• For each firm: Q = 30, P = `40, profits = `900
 Cartel: a group of firms acting in unison,
e.g., Cingular and bRural in the outcome with
collusion

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 "cartel" includes an association of producers,
sellers, distributors, traders or service providers
who, by agreement amongst themselves, limit,
control or attempt to control the production,
distribution, sale or price of, or, trade in goods or
provision of services;
(Competition Act 2002)

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32
 DRAM Price Fixing:
 
“Samsung is the third major semiconductor
company, after the Korean manufacturer Hynix
Semiconductor Inc. and the German
manufacturer Infineon Technologies AG, to
agree to plead guilty to fixing DRAM prices. “
--US Dept of Justice

33
“Our competitors are our friends, our customers
are the enemy” is an actual statement made by
an executive of Archer Daniel Midland, in the
famous case of the lysine (a feed additive)
cartel, which was caught on videotape by the
FBI.

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35
 Collusion vs. Self-Interest
 Both firms would be better off if both stick to the
cartel agreement.
 But each firm has incentive to renege on the
agreement.
 It is difficult for oligopoly firms to form cartels and
honor their agreements (Cartels are not
sustainable over the long run).

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 Nash Equilibrium
 John Forbes Nash Jr
1928..
 Shared the 1994 Nobel
Memorial Prize in
Economic Sciences
with game theorists
Reinhard Selten and
John Harsanyi.

37
 “The distinction between cooperative and non-
cooperative games is unrelated to the
mathematical description by means of pure
strategies and pay-off functions of a game.
Rather, it depends on the possibility or
impossibility of coalitions, communication, and
side-payments. “ Princeton PhD Thesis of 28
pages by Nash submitted in 1951
 Nash describes the possible equilibrium in n-
person non-cooperative games and reduces the
results to include cooperative games as well.

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 The Equilibrium for an Oligopoly
 Nash equilibrium: a situation in which
economic participants interacting with one another
each choose their best strategy given the strategies
that all the others have chosen
 Our duopoly example has a Nash equilibrium
in which each firm produces Q = 40.
• Given that bRural produces Q = 40,
Cingular’s best move is to produce Q = 40.
• Given that Cingular produces Q = 40,
bRural’s best move is to produce Q = 40.

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 A Comparison of Market Outcomes
When firms in an oligopoly individually choose
production to maximize profit,
• Q is greater than monopoly Q
but smaller than competitive market Q
• P is greater than competitive market P
but less than monopoly P

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 The Output & Price Effects
 Increasing output has two effects on a firm’s profits:
• output effect:
If P > MC, selling more output raises profits.
• price effect:
Raising production increases market quantity,
which reduces market price and reduces profit
on all units sold.
 If output effect > price effect,
the firm increases production.
 If price effect > output effect,
the firm reduces production.
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 The Size of the Oligopoly
 As the number of firms in the market increases,
• the price effect becomes smaller
• the oligopoly looks more and more like a
competitive market
• P approaches MC
• the market quantity approaches the socially
efficient quantity

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 Game Theory

 Game theory: the

study of how people
behave in strategic
situations.
 Theory of rational
behavior for interactive
decision problems.

43
 Game Theory….
 In a game, several agents strive to maximize
their (expected) utility index by choosing
particular courses of action, and each agent's
final utility payoffs depend on the profile of
courses of action chosen by all agents. The
interactive situation, specified by the set of
participants, the possible courses of action of
each agent, and the set of all possible utility
payoffs, is called a game; the agents 'playing' a
game are called the players.

44
 Game Theory
 Dominant strategy: a strategy that is best
for a player in a game regardless of the
strategies chosen by the other players
 Prisoners’ dilemma: a “game” between
two captured criminals that illustrates
why cooperation is difficult even when it is
mutually beneficial. It is used to explain the
basic problem of when the pursuit of self-interest
by each player in a game leads to a poor
outcome for all

45
 An example of the fundamental problem of cooperation
is the case where two industrial nations have erected
trade barriers to each other’s exports. Because of the
mutual advantages of free trade, both countries would
be better off if these barriers were eliminated. But if
either country were to eliminate its barriers unilaterally,
it would find itself facing terms of trade that hurt its own
economy. In fact, whatever one country does, the other
country is better off retaining its own trade barriers.
Each country has an incentive to retain trade barriers,
leading to a worse outcome than would have been
possible had both countries cooperated with each
other.

46
 Prisoners’ Dilemma Example
 The police have caught Ranga and Billa,
two suspected bank robbers, but only have
enough evidence to imprison each for 1 year.
 The police question each in separate rooms,
offer each the following deal:
• If you confess and implicate your partner,
you go free.
• If you do not confess but your partner implicates
you, you get 20 years in prison.
• If you both confess, each gets 8 years in prison.

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 Prisoners’ Dilemma Example
Confessing is the dominant strategy for both players.
Nash equilibrium:
Ranga’s decision
both confess
Confess Remain silent
Ranga gets Ranga gets

Confess 8 years 20 years

Billa Billa
Billa’s gets 8 years goes free
decision Ranga goes Ranga gets
Remain free
1 year
silent Billa Billa
gets 20 years gets 1 year

48
 Prisoners’ Dilemma Example
 Outcome: Ranga and Billa both confess,
each gets 8 years in prison.
 Both would have been better off if both remained
silent.
 But even if Ranga and Ranga had agreed before
being caught to remain silent, the logic of self-
interest takes over and leads them to confess.

49
 Robert Axelrod*’s Question:
“Under what conditions will cooperation emerge in a world
of egoists without central authority?”
 Axelrod ran several iterated Prisoner’s Dilemma
tournaments for computer programs. The winning
program was TIT FOR TAT
 TIT FOR TAT’s Strategy:
1. Begin with cooperation
2. Respond to cooperation with cooperation
3. Respond to defection with defection

* Author of “Evolution of Co-operation” and Professor at University of Michigan 50

 Why People Sometimes Cooperate
 When the game is repeated many times,
cooperation may be possible. (Iterative
Prisoner’s Dilemma)
 Under suitable conditions, cooperation based
upon reciprocity can develop even between
antagonists. An indefinite number of interactions,
therefore, is a condition under which cooperation
can emerge.
 “For cooperation to prove stable, the future must have a
sufficiently large shadow . . . the importance of the next
encounter between the same two individuals must be great
enough to make [noncooperation] an unprofitable strategy.”
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 Side-Stepping for a Moment - Life
Lessons from TIT FOR TAT
1. Don’t be envious — the success of others is a
prerequisite for your own success
2. Don’t be the first to defect — cooperate as
long as you get cooperation in return
3. Reciprocate both cooperation and defection
— not forgiving and forgiving too easily can both
be costly
4. Don’t be too clever — being incomprehensible
is dangerous, to encourage cooperation you
need to make it easy for others to see your
intentions
52
53
 1. Resale Price Maintenance
 Occurs when a manufacturer imposes lower limits
on the prices retailers can charge.
 Is often opposed because it appears to reduce
competition at the retail level.
 Yet, any market power the manufacturer has
is at the wholesale level; manufacturers do not
gain from restricting competition at the retail level.
 The practice has a legitimate objective:
preventing discount retailers from free-riding
on the services provided by full-service retailers.

54
 Competition Act on RPM
 Anti-competitive agreements
“3. (1) No enterprise or association of enterprises
or person or association of persons shall enter
into any agreement in respect of production,
supply, distribution, storage, acquisition or
control of goods or provision of services, which
causes or is likely to cause an appreciable
adverse effect on competition within India.”

55
 Contd..
“(4) Any agreement amongst enterprises or
persons at different stages or levels of the
production chain in different markets, in respect
of production, supply, distribution, storage, sale
or price of, or trade in goods or provision of
services, including—
(e) resale price maintenance, shall be an
agreement in contravention of sub-section (1) if
such agreement causes or is likely to cause an
appreciable adverse effect on competition in
India.”
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 Contd..
“Explanation
(e) "resale price maintenance" includes any
agreement to sell goods on condition that the
prices to be charged on the resale by the
purchaser shall be the prices stipulated by the
seller unless it is clearly stated that prices lower
than those prices may be charged.”

57
 2. Predatory Pricing
 Occurs when a firm cuts prices to prevent entry
or drive a competitor out of the market,
so that it can charge monopoly prices later.
 Illegal under Competition Act, but hard for the
Competition Commission to determine when a
price cut is predatory and when it is competitive &
beneficial to consumers.

58
 The “predatory price” under the Competition Act
means “the sale of goods or provision of services,
at a price which is below the cost, as may be
determined by regulations, of production of goods
or provision of services, with a view to reduce
competition or eliminate the competitors”
[Explanation (b) of Section 4]
 Many economists doubt that predatory pricing is a
rational strategy:
• It involves selling at a loss, which is extremely
costly for the firm.
• It can backfire.

59
 Zenith, American TV set manufacturers alleged that the
Japanese companies were selling their products below
costs in the US, while selling similar products in Japan
at above cost levels to cross–subsidise the former loss
making sales.
 “The predation recoupment story, therefore, does not
make sense, and we are left with the more plausible
inference that the defendants did not sell below cost in
the first place. They were just engaged in hard
competition”. US Dept of Justice 1986

60
 According to an International Herald Tribune
article, the French government ordered
amazon.com to stop offering free shipping to its
customers, because it was in violation of French
predatory pricing laws. After Amazon refused to
obey the order, the government proceeded to
fine them €1,000 per day. Amazon continued to
pay the fines instead of ending its policy of
offering free shipping.

61
 France Telecom/Wanadoo—The European
Court of Justice judged that Wanadoo (Now
Orange Internet France) charged less than cost
in order to gain a lead in the French broadband
market. They have been ordered to pay a fine of
€10.35m.
 German government ordered Wal-Mart to
increase its prices in Germany.

62
 “Unemployment due to slide-down of indigenous
retailers as a result of FDI in retail, sidelining of
consumers’ welfare due to predatory pricing by
retail giants, leading to their monopolistic
position and dictating of retail prices and unduly
affecting of farmers due to non-remunerative
prices, paid by procurement centres constituted
by big corporates.“
Report of the Standing Committee on
FDI in Retail Sector.

63
Chinese Tyres Vs ATMA

64
 Worried by massive 1300 per cent jump in tyre imports from
China in the last five years, (08.12.2008) Automotive Tyre
Manufacturers Association (ATMA) asked government to
immediately impose an anti-dumping duty on import of radial
truck and bus tyres.
 Truck makers, including Tata Motors, have appealed to the
Centre against the anti-dumping duty on bus and truck radial
tyres imported from China. Chinese radial tyre makers too
have made a similar appeal. The Designated Authority,
Directorate General of Anti-Dumping and Allied Duties,
recommended the imposition of definitive anti-dumping duty
on bus and truck radial tyres from China and Thailand in
January 2010, on a petition filed by the Automotive Tyre
Manufacturers Association. 13.07.2010

65
 3. Tying or Tie-in Arrangement
 Occurs when a manufacturer bundles two products
together and sells them for one price (e.g., Microsoft
including a browser with its operating system)
 Critics argue that tying gives firms more market
power by connecting weak products to strong ones.
 Others counter that tying cannot change market
power: Buyers are not willing to pay more for two
goods together than for the goods separately.
 “(a) "tie-in arrangement" includes any agreement requiring
a purchaser of goods, as a condition of such purchase, to
purchase some other goods;”

66
 Observations
 Oligopolies can end up looking like monopolies
or like competitive markets, depending on the
number of firms and how cooperative they are.
 The prisoners’ dilemma shows how difficult it is
for firms to maintain cooperation, even when
doing so is in their best interest.
 Policymakers use the competition laws to
regulate oligopolists’ behavior. The proper
scope of these laws is the subject of ongoing
controversy.

67
 Monopolistic Competition
 Monopolistic competition:
a market structure in which many firms sell
products that are similar but not identical.
 Examples:
• apartments
• books
• bottled water
• clothing
• fast food

68
 Comparing Perfect & Monop. Competition

perfect monopolistic
competition competition

number of sellers many many

free entry/exit yes yes

long-run econ. profits zero zero

the products firms sell identical differentiated

firm has market power? none, price-taker yes

downward-
D curve facing firm horizontal
sloping

69
Comparing Monopoly & Monop. Competition
monopolistic
monopoly
competition
number of sellers one many

free entry/exit no yes

long-run econ. profits positive zero

firm has market power? yes yes

downward-
downward-
D curve facing firm sloping
sloping
(market demand)
close substitutes none many
70
Comparing Oligopoly & Monop. Competition

monopolistic
oligopoly
competition

number of sellers few many

importance of strategic
high low
interactions between firms
likelihood of fierce
low high
competition

71
 A Monopolistically Competitive Firm
Earning Profits in the Short Run
The firm faces a
downward-sloping
D curve. Price
profit MC
At each Q, MR < P. ATC
P
To maximize profit,
ATC
firm produces Q D
where MR = MC.
The firm uses the MR
D curve to set P.
Q Quantity

72
 A Monopolistically Competitive Firm
With Losses in the Short Run

For this firm,

P < ATC
Price
at the output where MC
MR = MC.
losses ATC
The best this firm
ATC
can do is to
minimize its losses. P

D
MR
Q Quantity

73
 Monopolistic Competition and Monopoly
 Short run: Under monopolistic competition,
firm behavior is very similar to monopoly.
 Long run: In monopolistic competition,
entry and exit drive economic profit to zero.
• If profits in the short run:
New firms enter market,
taking some demand away from existing firms,
prices and profits fall.
• If losses in the short run:
Some firms exit the market,
remaining firms enjoy higher demand and prices.

74
A Monopolistic Competitor in the Long Run

Entry and exit

occurs until
P = ATC and Price
profit = zero. MC

Notice that the ATC

firm charges a P = ATC
markup of price
markup
over marginal
D
cost, and does MC
not produce at MR
minimum ATC. Q Quantity

75
 Why Monopolistic Competition Is
Less Efficient than Perfect Competition
1. Excess capacity
• The monopolistic competitor operates on the
downward-sloping part of its ATC curve,
produces less than the cost-minimizing output.
• Under perfect competition, firms produce the
quantity that minimizes ATC.
2. Markup over marginal cost
• Under monopolistic competition, P > MC.
• Under perfect competition, P = MC.

76
 Monopolistic Competition and Welfare
 Monopolistically competitive markets do not
have all the desirable welfare properties of
perfectly competitive markets.
 Because P > MC, the market quantity is below
the socially efficient quantity.
 Yet, not easy for policymakers to fix this problem:
Firms earn zero profits, so cannot require them
to reduce prices.

77
 Monopolistic Competition and Welfare
 Number of firms in the market may not be optimal,
due to external effects from the entry of new firms:
• the product-variety externality:
surplus consumers get from the introduction
of new products
• the business-stealing externality:
losses incurred by existing firms
when new firms enter market
 The inefficiencies of monopolistic competition are
subtle and hard to measure. No easy way for
policymakers to improve the market outcome.

78
 Advertising
 In monopolistically competitive industries,
product differentiation and markup pricing
lead naturally to the use of advertising.
 In general, the more differentiated the products,
the more advertising firms buy.
 Economists disagree about the social value of
advertising.

79
80
 The Critique of Advertising
 Critics of advertising believe:
• Society is wasting the resources it devotes to
advertising.
• Firms advertise to manipulate people’s tastes.
• Advertising impedes competition –
it creates the perception that products are
more differentiated than they really are,
allowing higher markups.

81
82
 The Defense of Advertising
 Defenders of advertising believe:
• It provides useful information to buyers.
• Informed buyers can more easily find and
exploit price differences.
• Thus, advertising promotes competition and
reduces market power.

83
 Advertising as a Signal of Quality
A firm’s willingness to spend huge amounts
on advertising may signal the quality of its product
to consumers, regardless of the content of ads.
• Ads may convince buyers to try a product once,
but the product must be of high quality for people
to become repeat buyers.
• The most expensive ads are not worthwhile
unless they lead to repeat buyers.
• When consumers see expensive ads,
they think the product must be good if the company
is willing to spend so much on advertising.

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 Brand Names
 In many markets, brand name products coexist
with generic ones.
 Firms with brand names usually spend more on
advertising, charge higher prices for the products.
 As with advertising, there is disagreement about
the economics of brand names…

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 The Critique of Brand Names
 Critics of brand names believe:
• Brand names cause consumers to perceive
differences that do not really exist.
• Consumers’ willingness to pay more for brand
names is irrational, fostered by advertising.
• Eliminating govt protection of trademarks
would reduce influence of brand names,
result in lower prices.

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 The Defense of Brand Names
 Defenders of brand names believe:
• Brand names provide information about quality
to consumers.
• Companies with brand names have incentive
to maintain quality, to protect the reputation of
their brand names.

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 Observations
 Differentiated products are everywhere;
examples of monopolistic competition abound.
 The theory of monopolistic competition
describes many markets in the economy,
yet offers little guidance to policymakers looking
to improve the market’s allocation of resources.

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 Some more Anti Competitive
Practices
 “Oil companies to review petrol prices every
month The public sector oil companies: Indian
Oil Corporation, Hindustan Petroleum
Corporation, and Bharat Petroleum Corporation
will review petrol prices on a monthly basis. And
changes in price, if any, will be through mutual
consensus and remain at a uniform rate for the
public sector undertaking (PSU) companies.”
Business Line Dt 15.07.2010
(Price Fixing – Legal or Illegal?)
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 “Commerce Ministry for anti-dumping duty on
Chinese chemical: Acting on a complaint by Tata
Chemicals, the Commerce Ministry has
recommended imposition of anti-dumping duty on
imports of a chemical from China used in
household cleaning products.
 Based on preliminary findings, the Directorate
General of Anti-dumping and Allied Duties (DGAD)
has recommended a provisional duty of up to
US$0.671 per kg on import of Sodium
Tripolyphosphate (STPP) from China.
Business Line Dt 28th May 2010
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 Advisory Panel on Institutions and Market
Structure - Volume V RBI Report:
“Under the provisions of Competition Act, every person or
enterprise proposing to enter into a combination is
required to give notice to the Commission before
entering into a combination and wait for 210 days. This,
apart from delaying the whole process, is likely to raise
regulatory conflicts. This is applicable to all categories of
banks including SBI, its associates and nationalised
banks. Considering the gravity of the matter and the
repercussions, it is necessary to have a serious look into
the whole issue and if considered necessary, Central
Government should give exemption to banks under
Section 54 of Competition Act.”

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 Anticompetitive Practices OECD Definition
“ Refers to a wide range of business practices in
which a firm or group of firms may engage in
order to restrict inter-firm competition to
maintain or increase their relative market
position and profits without necessarily providing
goods and services at a lower cost or of higher
quality.”

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 Intel and AMD: A long history in court
 1991--AMD files an antitrust complaint in Northern
California claiming that Intel engaged in unlawful acts
designed to secure and maintain a monopoly.
 1992--A court rules against Intel and awards AMD $10
million plus a royalty-free license to any Intel patents used
in AMD's own 386-style processor.
 1995--AMD settles all outstanding legal disputes with Intel
in a deal that gives AMD a shared interest in the x86 chip
design, which remains to this day the basic architecture of
chips used to make personal computers.
 2005--AMD files an antitrust suit against Intel in U.S. The
complaint alleges that Intel has unlawfully maintained its
monopoly in the x86 microprocessor market by coercing
customers worldwide from dealing with AMD.
http://news.cnet.com/Intel-and-AMD-A-long-history-in-court/2100-1014_3-5767146.html?
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tag=nw.20
 The Competition Commission of India (CCI) has
prepared a 245-page dossier detailing how the National
Stock Exchange (NSE) has over several years abused
its dominant position and financial muscle to kill
competition in the country's stock exchange space.

The investigation, carried out by a director general (DG)

of CCI, has found that NSE violated Section 4(2)( a)( ii),
and Section 4(2)( e) read with 4(1) of the Competition
Act, 2002. CCI has suggested several remedial
measures which could lead to the division of NSE into
more than one entity so that there is competition in the
country's stock exchange business. TOI 22.11.2010

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 List of ACP
 Dumping  Resale Price Maintenance
 Exclusive dealing  Absorption of a competitor
 Price fixing  Subsidies from government
 Refusal to deal  Protectionism, Tariffs and
Quotas
 Dividing territories
 Tying or Tie-in  Bid rigging
 Predatory pricing

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