AP_Krugman_Textbook

Module 64Introduction to Oligopoly

Module 65Game Theory

Module 66Oligopoly in Practice

Module 67 Introduction to Monopolistic Competition

Advertising Module 68Product Differentiation and

Advertising

Economics by Example:
“What’s Behind the Music Industry’s Woes?”

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637

Market

Structures:

Imperfect

Competition

The agricultural products company Archer Daniels Mid-
land (also known as ADM) has often described itself as
“supermarket to the world.” In 1993, executives from
ADM and its Japanese competitor Ajinomoto met to dis-
cuss the market for lysine, an additive used in animal
feed. In this and subsequent meetings, the two companies
joined with several other producers to set targets for the
price of lysine, behavior known as price-fixing. Each com-
pany agreed to limit its production to achieve the price
targets, with the goal of raising industry profits. But what
the companies were doing was illegal, and the FBI had
bugged the meeting room with a camera hidden in a
lamp. Over the past few years, there have been numerous
investigations and some con-
victions for price-fixing in a
variety of industries, from in-
surance to college education
to computer chips. Despite
its illegality, some firms con-
tinue to attempt to fix the
price of their products.
In the fast food market, it
is the legal practice of product
differentiation that occupies
the minds of marketing exec-
utives. Fast-food producers go
to great lengths to convince

you they have something special to offer beyond the ordi-

nary burger: it’s flame broiled or 100% beef or super-thick

or lathered with special sauce. Or maybe they offer chicken

or fish or roast beef. And the differentiation dance goes on

in the pizza industry as well. Pizza Hut offers cheese in the

crust. Papa John’s claims “better ingredients.” Dominoes

has a “new recipe,” and if you don’t want thin crust, the al-

ternative isn’t “regular,” it’s “hand tossed”! The slogans

and logos for fast-food restaurants often seem to differ

more than the food itself.

To understand why ADM engaged in illegal price-

fixing and why fast-food joints go to great lengths to

differentiate their patties and pizzas, we need to under-

stand the two market struc-

tures in between perfect

competition and monopoly

in the spectrum of market

power—oligopoly and mo-

nopolistic competition. The

models of these two market

structures are at the same

time more complicated and

more realistic than those we

studied in the previous sec-

tion. Indeed, they describe

the behavior of most of the

firms in the real world.