Monopolistic Competition and Oligopoly These slides supplement the textbook, but should not replace...
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Transcript of Monopolistic Competition and Oligopoly These slides supplement the textbook, but should not replace...
Monopolistic Competition and
Oligopoly
These slides supplement the textbook, but should not replace reading the textbook
2
A market structure between pure competition and monopoly
What isimperfect competition?
3
What is monopolistic competition?
A market structure in which a large number of firms sell close substitutes which are different enough that each firm’s demand curve slopes downward
4
How can firms differentiate under
monopolistic competition?
Physical differencesLocationServicesProduct image
5
Restaurants Clothing stores Grocery stores Jewelry stores
What are examples of monopolistic competition?
6
Where are profits maximized or minimized ?
MR = MC
7
Dol
lars
per
un
it
p
Quantity per period
The Firm Monopolistic Competition in the Short Run
MC
0Exhibit 1 (a)
MR
ATC
c Profit
q
D = AR
b
ce
8
Dol
lars
per
un
it
p
Quantity per period
The Firm Monopolistic Competition in the Short Run
MC
0Exhibit 1 (b)
MRq
ATCLoss
D=AR
AVC
c cb
9
Yes!Positive or negative
economic profit can be made in the short run
In monopolistic competition, can
economic profit be made in the short run?
10
What is long-run profit in monopolistic
competition?
Zero
11
Why is economic profit zero over the long-run?Because if economic profits are being made more firms will enter into the industry; if losses are being made more firms will leave the industry
12
Dol
lars
per
un
it
p
Quantity per period
Long Run Equilibrium in Monopolistic Competition
MC
0Exhibit 2
MR
ATC
q
D = AR
b
a
13
How does monopolistic
competition compare with perfect
competition?They both make a normal profit over the long-run
14
Dol
lars
per
un
it
p
Quantity per period
Perfect Competition
MC
0Exhibit 3 (a)
ATC
q
d = AR
15
What is an oligopoly?
A market structure characterized by a small number of firms whose behavior is interdependent
16
AutomobilesSteelSoupCereals
What are examples of oligopoly?
17
What is a possible explanation for the
formation of oligopolies?
Barriers to entry, such as economies of scale or a high cost of entry
18
Dol
lars
per
un
it
ca
Autos per year
Economies of Scale as Barriers to Entry
0Exhibit 4
S
a
cb
b
M
19
What is a collusion?An agreement among firms to divide the market or to fix the market price to maximize economic profit
20
Cooperation involving direct communication between competing firms about setting prices
What is explicit collusion?
21
Cooperation involving indirect communication between competing firms about setting prices
What is implicit collusion?
22
What is a cartel?A group of firms that agree to coordinate their production and pricing decisions, thereby behaving as a monopolist
23
Organization of Petroleum Exporting Countries (OPEC)
International Electrical Association (IEA)
What are two examples of cartels?
24
Dol
lars
per
un
it
P
Quantity per period
Cartel Model Where Firms Act as a Monopolist
MC
0Exhibit 5
MRQ
D = AR
25
What are the problems of stability?
Differences in costsNumber of firmsNew entryCheating
26
Interdependence - No firm will not take an action unless it considers the reaction from the other firms
What distinguishes oligopoly?
27
B and C will not raise their price
Imagine 3 identical firms in an industry – A, B, C. What happens if A raises price?
28
B and C will lower their price
Imagine 3 identical firms in an industry – A, B, C. What happens if A lowers price?
29
What is a price leader?A firm whose price is adopted by the rest of the industry
30
barometric-firmdominant firmmost innovative
Who is the price leader?
31
What iscost-plus pricing?
A method of determining the price of a good by adding a percentage markup to average variable cost
32
What is game theory?A model that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms
33
What is a duopoly?A market with only two producers, who compete with each other; a type of oligopoly market structure
34
What is strategy?In game theory, the operational plan pursued by a player
35
What is apayoff matrix?
In game theory, a table listing the payoffs that each player can expect based on the strategy that each player pursues
36
What is a kinked demand curve?A demand curve that illustrates price stickiness; if one firm cuts prices, others will cut theirs, but if the firm raises prices, others will not change theirs
37
Pri
ce p
er u
nit
P
Quantity per period
The Kinked Demand Model of Oligopoly
0Exhibit 7
Q
DD'
more elastic
more inelastic
38
Pri
ce p
er u
nit
P
Quantity per period
D and MR Curves for the Kinked Demand Model
0Exhibit 8
Q
D1
D2MR1
MR2
39
How does price under an oligopoly compare to price under perfect
competition?Price is usually higher under an oligopoly
40
How do profits under an oligopoly compare to profits under perfect
competition?Profits are higher under an oligopoly
41
What is a horizontal merger?
A merger in which one firm combines with another firm that produces the same product
42
What is avertical merger?
A merger in which one firm combines with another from which it purchases inputs or to which it sells output
43
What is a conglomerate merger?
A merger involving the combination of firms producing in different industries
END