Nordstrom’s), plus 14 more stores that sold women’s specialty clothing (like Motherhood Maternity and

Victoria’s Secret). Most of the markets that consumers encounter at the retail level are monopolistically

competitive.

The other type of imperfectly competitive market is oligopoly. Oligopolistic markets are those which a small

number of firms dominate. Commercial aircraft provides a good example: Boeing and Airbus each produce

slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink

industry, which Coca-Cola and Pepsi dominate. We characterize oligopolies by high barriers to entry with firms

choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the

market. In this chapter, we first explore how monopolistically competitive firms will choose their profit-

maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to
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