8th Lecture Mono Pol is Tics
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Transcript of 8th Lecture Mono Pol is Tics
8/2/2019 8th Lecture Mono Pol is Tics
http://slidepdf.com/reader/full/8th-lecture-mono-pol-is-tics 1/12
Monopolistic Competition,
Oligopoly
8/2/2019 8th Lecture Mono Pol is Tics
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Theory of Monopolistic
Competition• There are many sellers
and buyers
• Each firm in theindustry produces and
sells a slightly
differentiated product
• There is easy entry and
exit.
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The Nature of Monopolistic
Competition• There are substitutes for a firms product, but not
perfect substitutes.
• In perfect competition P = MC , in monopoly, P > MC .
• In perfect competition, the demand curve is sosteep it is practically horizonal; in monopolistic
competitors, the demand curve is downwardsloping
• In the monopolistic competitor P > MR.
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The Monopolistic Competitive Output
and Price
The monopolistic
competitor produces that
quantity of output for which MR= MC . This is
Q1 in the exhibit. It
charges the highest priceconsistent with the
quantity , which is P1.
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Will There be Profits in the Long
Run?• If firms in the industry are earning profits,
new firms will enter the industry and reduce
the demand that each firm faces.
• Eventually, competition will reduce
economic profits to zero in the long run.
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Monopolistic Competition in the
Long RunBecause of easyentry into theindustry, there are
likely to be zeroeconomic profits inthe long run for amonopolistic
competitor. Inother words,P=ATC
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A Comparison of Perfect
Competition and
Monopolistic Competition
The perfectly
competitive firm produces a
quantity of output
consistent with
lowest unit costs.
The monopolistic
competitor does
not. If it did, it
would either
produce qMC2,
instead of qMC1
.
The monopolistic
competitor is said
to underutilize its
plant size or to
have excessstorage capacity.
8/2/2019 8th Lecture Mono Pol is Tics
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Oligopoly: Assumptions and
Real-World Behavior • There are few sellers and many buyers
• Firms produce and sell either homogeneous
or differentiated products.
• There are significant barriers to entry.
• Concentration Ratio: The percentage of
industry sales accounted for by a set
number of firms in the industry.
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Price and Output under Oligopoly
• Cartel Theory: oligopolists in an industry act as if
there were only one firm in the industry.
• A Cartel is an organization of firms that reducesoutput and increases price in an effort to increase
joint profits.
• Each potential member has an incentive to be a free
rider, to stand by and take a free ride from the
actions of others.
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The Benefits of Being Members
of a CartelWe assume the industryis in long-runequilibrium, producingQ1, and charging P 1.
There are no profits. Areduction in output to QC
through the formation of a cartel raises price to P C
and brings profits of CP C AB
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Problems with Cartels
• High profits will provide an incentive for firmsfrom outside the industry to join the industry.
• After the cartel agreement is made, cartel membershave an incentive to cheat on the agreement.
• If a firm cheats on the cartel agreements and other firms do not, then the cheating firm can increase its
profits. Of course if all firms cheat, the cartelmembers are back where they started at: no cartelagreements and at the original price.
fi f h i i
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Benefits of Cheating in a
Cartel AgreementThe situation for arepresentative firm of the cartel: in long-run
competitiveequilibrium, it producesq1 and charges P 1,
earning zero economic profits. As a
consequence of thecartel agreement, itreduces output to qC and
charges P C . Its profits
are the are CP C AB. If itcheats on the cartelagreement and othersdo not, the firm willincrease output to qCC
and reap profits of FP DE