310 likes | 506 Views
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
E N D
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 • Easy Entry and Exit • Advertising
CHARACTERISTICS • Differentiated Products • Product Attributes • Service • Location • Brand Names and Packaging • Some Control Over Price • Demand for Product is Highly Elastic
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Expect New Competitors ATC P1 A1 Price and Costs Short-Run Economic Profits D MR Q1 Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Expect New Competitors ATC New competition providesother goods in the marketso demand for your good falls. P1 A1 Price and Costs Short-Run Economic Profits D MR Q1 Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC ATC A2 P2 Short-Run Economic Losses Price and Costs D MR Q2 Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC ATC With economic losses, firms will exit the market. Fewer competitorsmeans your demand will increase. A2 P2 Short-Run Economic Losses Price and Costs D MR Q2 Quantity
PRICE AND OUTPUT IN MONOPOLISTIC COMPETITION MC Long-Run Equilibrium Normal Profit Only ATC P3 = A3 Price and Costs D MR Q3 Quantity
MONOPOLISTIC COMPETITION AND EFFICIENCY • Not Productively Efficient • P Minimum ATC • Not Allocatively Efficient • P MC • Excess Capacity Graphically…
Price is Not = Minimum ATC Price MC MONOPOLISTIC COMPETITION AND EFFICIENCY MC Long-Run Equilibrium ATC P3 = A3 Price and Costs D MR Q3 Quantity
Pure Monopoly Pure Competition Monopolistic Competition Oligopoly Market Structure Continuum FOUR MARKET MODELS Oligopoly: • Control Over Price • Mutual Interdependence • Strategic Behavior • Entry Barriers • Economies of Scale • Control of Resources
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
OLIGOPOLIES AND MERGERS Herfindahl 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.
CARTELS AND OTHER COLLUSION Oligopoly is conducive to collusion. If a few firms face similar demand and costs they will seek joint profit maximization as a monopoly. Graphically…
Economic Profit MC P0 Price and costs ATC A0 D MR = MC MR Q0 CARTELS AND OTHER COLLUSION Colluding Oligopolists Will Split the Monopoly Profits.
CARTELS AND OTHER COLLUSION • Overt Collusion • Cartel • The OPEC Cartel • Covert Collusion • Illegal in the U.S. • Tacit Understandings – “Gentlemen’s Agreements”
CARTELS AND OTHER COLLUSION • Obstacles to Collusion • Demand and Cost Differences • Number of Firms • Cheating • Price Wars • Potential Entry • Antitrust Law
OLIGOPOLY AND EFFICIENCY • Not Productively Efficient • P Minimum ATC • Not Allocatively Efficient • P MC
Game Theory Introduction to Game Theory…
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Uptown’s Price Strategy
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Greatest Combined Profit Uptown’s Price Strategy
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Independent Actions Stimulate Response Uptown’s Price Strategy
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Independent Actions Stimulate Response Uptown’s Price Strategy Gravitating to the Worst Case
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Collusion Invites a Different Solution. Uptown’s Price Strategy
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Collusion Invites a Different Solution. Uptown’s Price Strategy
High Low A B $12 $15 High $12 $6 D C $6 $8 Low $15 $8 OLIGOPOLY BEHAVIOR A Game-Theory Overview RareAir’s Price Strategy Collusion Invites a Different Solution. But, the incentive to cheat is very real. Uptown’s Price Strategy
Practical Uses of Game Theory Pricing 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%
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
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.
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.