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Monopoly, Monopolistic Competition, and Oligopolies

Monopoly, Monopolistic Competition, and Oligopolies . A Review . Efficiency . LMC. $. LATC. Q. o. Monopoly . An algebraic exercise: . The following is the market demand for a patented cancer drug produced by ABC pharmaceutical company. Q = 100,000 – 100 P

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Monopoly, Monopolistic Competition, and Oligopolies

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  1. Monopoly, Monopolistic Competition, and Oligopolies A Review

  2. Efficiency LMC $ LATC Q o

  3. Monopoly

  4. An algebraic exercise: The following is the market demand for a patented cancer drug produced by ABC pharmaceutical company. Q = 100,000 – 100 P ABC’s production cost function for this drug is: TC = 2,000,000 + 5Q + .04 Q2 Demand : P = 1000 - .01 Q MR = 1000 - .02 Q MC = 5 + .08 Q Setting MR = MC, 5 + .08 Q = 1000 -.02 Q .10 Q = 995 Qe = 9950 Pe = 900.05 Profit = P.Q – TC =8,995,999.75 – 2,000,000. – 49,975. – 3,996,001 = 2,950,023.75

  5. Monopolistic Competition The characteristics of a monopolistic market: · Many firms producing similar but differentiated products · Relatively free entry and exit · Each firm perceives a demand curve reflecting the relationship between its price the quantity demanded of its own product. · The firm can influence the price by change the quantity it supplies or by differentiating its product from those of its competitors. · The firm’s output and price are in equilibrium when the price the firm charges is consistent with its market share

  6. Monopolistic competition: A firm’s market share

  7. Demand facing firm:

  8. S-R Equilibrium

  9. L-R Equilibrium

  10. Oligopoly • A few firms producing similar goods • Limited entries • Interdependence • The kinked demand curve model • The Cournot model • Price leadership models • The Game theory

  11. The Cournot Model

  12. The Cournot Equilibrium

  13. The Kinked Demand Curve Model

  14. Tech-Based Price Leadership

  15. Size-Based Leadership

  16. Algebraic derivation of the leader’s demand: If the market demand is Qdm = 1000 – 20 P and the small firms’ supply is: Qss = -100 + 10 P, the demand faced by the leader is: QdL = Qdm –Qss = 1000 – 20 P – ( -100 + 10 P ) = 1100 - 30 P

  17. The Game Theory • The prisoner’s dilemma • Dominant Strategy • The Nash Equilibrium

  18. The Prisoner’s Dilemma Jill Confess Not confess Jack: 2 years Jack: 1 year Jill: 10 yeas Confess Jill: 2 years Jack Jack: 10 years Jill: 1 year Jack: 5 years Jill: 5 years Not confess

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