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Monopolistic Competition & Oligopoly. Pure Monopoly. Pure Competition. Monopolistic Competition. Oligopoly. Market Structure Continuum. FOUR MARKET MODELS. Monopolistic Competition:. CHARACTERISTICS. Large Number of Sellers Small Market Shares No Collusion Independent Action - PowerPoint PPT Presentation
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Monopolistic Competition& Oligopoly
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSMonopolistic Competition:
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
CHARACTERISTICS•Large Number of Sellers•Small Market Shares•No Collusion•Independent Action
•Easy Entry and Exit•Advertising
11 - 4
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
•Differentiated Products• Product Attributes• Service• Location• Brand Names and
Packaging• Some Control Over
Price• Demand for Product is
Highly Elastic
CHARACTERISTICS
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
D
MR
P1
ATCPr
ice
and
Cos
ts
Q1
Short-RunEconomic
Profits
Expect New Competitors
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A1
MC
11 - 6
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
D
MR
P1
ATCPr
ice
and
Cos
ts
Q1
Expect New Competitors
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A1
New competition providesother goods in the market
so demand for your good falls.
MC
Short-RunEconomic
Profits
11 - 7
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
D
MR
MC
P2
ATCPr
ice
and
Cos
ts
Q2
Short-RunEconomic
Losses
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A2
11 - 8
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Short-RunEconomic
Losses
D
MR
MC
P2
ATCPr
ice
and
Cos
ts
Q2
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A2With economic losses, firms willexit the market. Fewer competitorsmeans your demand will increase.
11 - 9
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
D
MR
MC
P3 = A3
ATCPr
ice
and
Cos
ts
Q3
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
Long-Run EquilibriumNormalProfitOnly
11 - 10
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
MONOPOLISTIC COMPETITIONAND EFFICIENCY
• Not Productively EfficientP Minimum ATC
• Not Allocatively EfficientP MC
• Excess Capacity
Graphically…
11 - 11
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
D
MR
MC
P3 = A3
ATCPr
ice
and
Cos
ts
Q3Quantity
Long-Run EquilibriumPrice is Not= Minimum
ATC
Price MC
MONOPOLISTIC COMPETITIONAND EFFICIENCY
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSOligopoly:• Control Over Price• Mutual Interdependence• Strategic Behavior
• Entry Barriers• Economies of Scale• Control of Resources
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLIES AND MERGERS•Many Oligopolies Created by Mergers
•Measures of Industry Concentration•4 Firm Concentration Ratio
•50 to 80%•Half of US Industries
•Herfindahl Index
11 - 14
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLIES AND MERGERSHerfindahl Index
Sum of the squared percentage market shares for all firms in the industry.
(%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2
A greater Herfindahl Index indicates a greater concentration of market power in the industry.
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
If a few firms face similar demand and costs they will seek joint profit maximization as a monopoly.
Oligopoly is conducive to collusion.
CARTELS AND OTHER COLLUSION
Graphically…
11 - 16
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Colluding Oligopolists WillSplit the Monopoly Profits.
D
MC
ATC
MR
EconomicProfit
MR = MC
Pric
e an
d co
sts
Q0
P0
A0
CARTELS AND OTHER COLLUSION
11 - 17
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Overt Collusion•Cartel•The OPEC Cartel
Covert Collusion•Illegal in the U.S.•Tacit Understandings
– “Gentlemen’s Agreements”
CARTELS AND OTHER COLLUSION
11 - 18
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Obstacles to Collusion• Demand and Cost
Differences• Number of Firms• Cheating• Price Wars• Potential Entry• Antitrust Law
CARTELS AND OTHER COLLUSION
11 - 19
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY AND EFFICIENCY
• Not Productively EfficientP Minimum ATC
• Not Allocatively EfficientP MC
11 - 20
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Game Theory
Introduction to Game Theory…
11 - 21
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
11 - 22
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
GreatestCombined
Profit
11 - 23
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
IndependentActions
StimulateResponse
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Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
IndependentActions
StimulateResponse
Gravitatingto the
Worst Case
11 - 25
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
CollusionInvites aDifferentSolution.
11 - 26
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
CollusionInvites aDifferentSolution.
11 - 27
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
OLIGOPOLY BEHAVIORA Game-Theory Overview
High
Low
High LowU
ptow
n’s
Pric
e St
rate
gyRareAir’s Price Strategy
BA
DC
$12 $15
$12 $6
$6 $8
$8$15
But, theincentiveto cheatis very real.
CollusionInvites aDifferentSolution.
11 - 28
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Practical Uses of Game TheoryPricing Option 1$59 Web Only$125 Print Only
Pricing Option 2$59 Web Only$125 Print Only$125 Web & Print
68%32%
16%0%84%
11 - 29
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Practical Uses of Game Theory
• 1 Share of Federated stock is worth $100
• Macy’s is offering to buy it for $102• Campeau’s Bid
– If he gets less than 50% everyone gets $105– For 50% through 100% he pays a blended
rate which would max at $97.50– If he gets more than 50% of the stock and
you don’t sell he can buy your stock for $90
11 - 30
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Practical Uses of Game Theory
Possibility 1: Campeau gets less than 50%
• Campeau = $105• Macy’s = $102• Hold = $100
• Dominant strategy is to sell to Campeau.
Possibility 2:Campeau gets more than 50%
• Campeau = $97.50• Macy’s = $0• Hold = $90
• Dominant strategy is to sell to Campeau.
11 - 31
Monopolistic CompetitionPrice and Output in Monopolistic CompetitionMonopolistic Competition and EfficiencyOligopolyOligopolies and MergersCartels and CollusionOligopoly and EfficiencyGame Theory
Practical Uses of Game Theory
• Did you get that? • Everybody had stock worth $100. • Everyone could sell to Macy's for
$102.• Instead, everybody sold to
Campeau for $97.50. • Game Theory explains why.