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Quasi-Competitive Model

Quasi-Competitive Model. A model of oligopoly pricing in which each firm acts as a price taker even though there may be few firms is a quasi-competitive model . As a price taker, a firm will produce where price equals long-run marginal costs.

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Quasi-Competitive Model

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  1. Quasi-Competitive Model • A model of oligopoly pricing in which each firm acts as a price taker even though there may be few firms is a quasi-competitive model. • As a price taker, a firm will produce where price equals long-run marginal costs. • This equilibrium will resemble the perfectly competitive solution, even with few firms.

  2. P P P MC MC MC DIND D1 D2 Firm 1 Firm 2 Industry

  3. Quasi Competitive ModelIndustry Price C P MC C D MR Q Quantity 0 C per week

  4. Cartel Model • Firms collude on price and/or quantities • They act as if they are a monopoly • They set an industry price where MRi = MCi • The cartel model is not efficient • Side payments are necessary to equalize profit

  5. Cartel Model • Maintaining this cartel solution poses three problems: • Cartel formations may be illegal, as it is in the U.S. by Section I of the Sherman Act of 1890. • It requires a considerable amount of costly information be available to the cartel. • The market demand function. • Each firm’s marginal cost function.

  6. Cartel Problems • Illegal in the U.S. • Side Payments are difficult • Incentives to Cheat • Relationships between members is complex

  7. Cartel Model • A model of pricing in which firms coordinate their decisions to act as a multiplant monopoly is the cartel model. • Assuming marginal costs are constant and equal across firms, the cartel output is point M • The plan would require a certain output by each firm and how to share the monopoly profits.

  8. Cartel Model MC1 Industry P Firms P MCi=SMC1+MC2 MC2 Pi Di MRi Di MRi Q Qi Q Q1 Q2 MRi=SMC1+MC2 Companies unite to maximizes industry profit

  9. Cartel Model Price P M M P A A C P MC C D MR Q Q Q Quantity 0 M A C per week

  10. Formal Model of Price Leadership Model Price SC P 1 D’ P L P 2 MC MR’ D Quantity per week 0 Q Q Q C L T

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