Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 239
Fig. 10-1
10.3 LONG-RUN EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION
If the firms in a monopolistically competitive industry earned economic profits in the short run, firms will
enter the industry in the long run. This shifts each firm’s demand curve down (since each firm now has a smaller
share of the market) until all profit are squeezed out. The opposite occurs if firms suffered losses in the short run.
EXAMPLE 2. If the typical or representative monopolistically competitive firm earns a profit in the short run, more firms
enter the market in the long run. This causes the demand curve of the typical firm (say, d in Fig. 10-1) to shift down to d 0 in
Fig. 10-2 (as the firm’s market share declines), so as to be tangent to the LAC curve at the output level of 4 units, at which
MR 0 ¼ LMC (point E 0 ). At Q ¼ 4,P ¼ LAC ¼ SAC 0 ¼ $6 (point A 0 ) and the firm breaks even in the long run.
Fig. 10-2
10.4 OLIGOPOLY DEFINED
Oligopoly is the market organization in which there are few sellers of a commodity. So, the actions of each
seller will affect the other sellers. As a result, unless we make some specific assumptions about the reactions of
other firms to the actions of the firms under study, we cannot construct the demand curve for that oligopolist,
and we will have an indeterminate solution. For each specific behavioral assumption we make, we get a different
solution. Thus, we have no general theory of oligopoly. All we have are many different models, most of
which are more or less satisfactory.