Transcript Ch18

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© 2013 Pearson
Oligopoly
18
CHECKPOINTS
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Checkpoint 18.1
Checkpoint 18.3
Checkpoint 18.4
Problem 1
Problem 1
Problem 2
Problem 2
Clicker
version
Problem 2
Problem 3
Problem 3
Clicker
version
In the news
Checkpoint 18.2
Problem 1
Problem 2
Problem 3
In the news
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Clicker
version
In the news
Problem 1
CHECKPOINT 18.1
Practice Problem 1
What are the distinguishing features of oligopoly?
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CHECKPOINT 18.1
Solution
The distinguishing features of oligopoly are a small
number of interdependent firms competing behind natural
or legal barriers to entry.
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CHECKPOINT 18.1
Practice Problem 2
Why are breakfast cereals made by firms in oligopoly?
Why isn’t there monopolistic competition in that industry?
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CHECKPOINT 18.1
Solution
Breakfast cereals are made by firms in oligopoly because
economies of scale and demand limit the number of firms
that can make a profit in that market.
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CHECKPOINT 18.1
Practice Problem 3
Sparks fly for Energizer
Energizer is gaining market share against competitor
Duracell and its profit is rising despite the sharp rise in
the price of zinc, a key battery ingredient.
Source: www.businessweek.com, August 2007
In what type of market are batteries sold? Explain your
answer.
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CHECKPOINT 18.1
Solution
The market for batteries is an oligopoly, and with two
dominant firms, it is a duopoly.
The number of firms is small, their actions are
interdependent, and economies of scale and the market
demand create a natural barrier to entry.
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CHECKPOINT 18.2
Practice Problem 1
Isolated Island has two natural
gas wells, one owned by Tom
and the other owned by Jerry.
The marginal cost of producing
gas is zero.
What will be the price of gas and
the quantity produced if Tom and
Jerry form a cartel and maximize
their joint profit?
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The demand schedule for
gas on this island.
CHECKPOINT 18.2
Solution
If Tom and Jerry form a cartel
and maximize their joint profit,
they will charge the monopoly
price.
This price is the highest price
the market will bear when
together they produce the
quantity at which marginal
revenue equals marginal cost.
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CHECKPOINT 18.2
Marginal cost is zero, so we
need to find the price at which
marginal revenue is zero.
Marginal revenue is zero when
total revenue is a maximum,
which occurs when output is 6
units a day.
The maximum price at which
they can sell 6 units a day is
$6 a unit.
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CHECKPOINT 18.2
The maximum price at which
they can sell 6 units a day is
$6 a unit.
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CHECKPOINT 18.2
Practice Problem 2
Isolated Island has two natural
gas wells, one owned by Tom
and the other owned by Jerry.
The marginal cost of producing
gas is zero.
If Tom and Jerry are forced to
sell at the perfectly competitive
price, what will be the price of
gas and the total quantity
produced?
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The demand schedule for
gas on this island.
CHECKPOINT 18.2
Solution
The perfectly competitive price
equals marginal cost, which is
zero.
In this case, price is zero and
the total quantity produced is
12 units a day.
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CHECKPOINT 18.2
Practice Problem 3
Isolated Island has two natural
gas wells, one owned by Tom
and the other owned by Jerry.
The marginal cost of producing
gas is zero.
If Tom and Jerry compete as
duopolists, what will be the price
of gas?
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The demand schedule for
gas on this island.
CHECKPOINT 18.2
Solution
If Tom and Jerry compete as
duopolists, they will increase
production to more than the
monopoly level.
The price will fall below the
monopoly price of $6 a unit,
but they will not drive the
price down to zero.
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CHECKPOINT 18.2
Study Plan Problem
Isolated Island has two natural gas
wells, one owned by Tom and the
other owned by Jerry. The marginal
cost of producing gas is zero. If they
compete as duopolist, the price of
gas will be:
A.
B.
C.
D.
$6 a unit
less than $6 a unit but not free
more than $6 a unit
$0 a unit
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The demand schedule for
gas on this island.
CHECKPOINT 18.2
In the news
Asian rice exporters to discuss cartel
Thailand, the world's largest rice exporter, proposed that
the Asian rice exporters (Thailand, Cambodia, Laos, and
Myanmar) form a cartel. The Philippines said it was a
bad idea.
Source: CNN, May 6, 2008
Explain how an Asian a profit-maximizing cartel would
influence the global market for rice and the world price of
rice. Is the Philippines correct?
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CHECKPOINT 18.2
Solution
If rice exporters form a cartel and operate as a profitmaximizing monopoly, they will maximize profit by
producing the quantity at which marginal revenue equals
marginal cost.
The profit-maximizing quantity that a monopoly produces
is less than the quantity that competitive rice growers
currently produce.
The supply of rice on the world market will decrease and
the world price of rice will rise.
If the cartel does not break down, then the Philippines is
correct: The price of rice will rise.
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CHECKPOINT 18.3
Practice Problem 1
Bud and Wise are trying to figure out how much of this new
beer to produce. They know that if:
Each produces 10,000 gallons a day, they will make the
maximum profit of $100,000 each.
Bud produces 20,000 gallons while Wise produces 10,000 a
day, Bud will make an economic profit of $150,000 and Wise
will incur an economic loss of $50,000 (or vice verse).
Each produces 20,000 gallons a day, they’ll make zero profit.
Construct the payoff matrix.
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CHECKPOINT 18.3
Solution
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CHECKPOINT 18.3
Practice Problem 2
Bud and Wise are the two
producers of a new beer.
Given the payoffs in the
payoff matrix, what is the
Nash equilibrium of the
game they play?
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CHECKPOINT 18.3
Solution
The Nash equilibrium is for both
to produce 20,000 gallons.
To see why, notice that
regardless of the quantity that
Bud produces, Wise makes
more profit by producing 20,000
gallons a day.
The same is true for Bud.
So Bud and Wise each produce
20,000 gallons a day.
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CHECKPOINT 18.3
Study Plan Problem
Bud and Wise are the two
producers of a new beer. Given the
payoffs in the payoff matrix, in the
Nash equilibrium Bud produces
______ and Wise produces ____.
A.
B.
C.
D.
10,000 gallons; 20,000 gallons
20,000 gallons; 10,000 gallons
20,000 gallons; 20,000 gallons
10,000 gallons; 10,000 gallons
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CHECKPOINT 18.3
Practice Problem 3
Bud and Wise are the two
producers of a new beer.
Given the payoffs in the
payoff matrix, what is the
outcome of the game if it is
played repeatedly?
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CHECKPOINT 18.3
Solution
If Bud and Wise play this
game repeatedly, each
produces 10,000 gallons a
day and makes maximum
economic profit.
They can achieve this
outcome by playing a tit-fortat strategy.
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CHECKPOINT 18.3
In the news
Microsoft Internet Explorer is faster than Mozilla Firefox
Promotions of the new Internet Explorer IE8 say it is faster, more
reliable, and more secure than rival browsers. One reviewer noted
that IE8 is slower than Firefox, but if you’re a light-duty user and
attracted to the new IE’s strong suite of fresh features, you might
prefer it to Firefox. Another says the point isn’t which browser is
hundredths of a second faster, but other features.
Source: USA Today, March 23, 2009
What is the game that Microsoft and Mozilla have played in the past
few years? How do you think the game will change in the coming
years?
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CHECKPOINT 18.3
Solution
The game that Microsoft and Mozilla have played is
product development: improving speed or adding features.
The outcome has been that both have allocated
development to increasing speed and as the reviewers
imply their speeds are only hundredths of a second apart
(basically the same).
In the coming years, the development game will probably
move away from speed and to additional features to
maintain or expand market share.
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CHECKPOINT 18.3
Study Plan Problem
Bud and Wise are the two
producers of a new beer. Given the
payoffs in the payoff matrix, if they
play repeatedly, Bud produces ____
and Wise produces ___.
A.
B.
C.
D.
10,000 gallons; 20,000 gallons
20,000 gallons; 10,000 gallons
20,000 gallons; 20,000 gallons
10,000 gallons; 10,000 gallons
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CHECKPOINT 18.4
Practice Problem 1
Explain each of the following terms:
• Attempt to monopolize
• Price fixing
• Predatory pricing
• Tying arrangements
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CHECKPOINT 18.4
Solution
An attempt to monopolize is an attempt by a company to
drive out its competitors so it can operate as a monopoly.
Price fixing is making an agreement with competitors to
set a specified price and not to vary it.
Predatory pricing is the attempt to drive out competitors by
charging a price that is too low for anyone to earn a profit.
Tying arrangements exist when a company does not offer
a buyer the opportunity to buy one item without buying
another item at the same time.
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CHECKPOINT 18.4
Practice Problem 2
Since 1987, hundreds of hospital mergers have taken place
in the United States.
Rarely has the U.S. Federal Trade Commission challenged a
hospital merger.
What can you infer about the structure of the market in
hospital services?
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CHECKPOINT 18.4
Solution
The U.S. Federal Trade Commission will not challenge a
merger if it will not substantially lessen competition.
Such a situation arises if
(1) the merger would not increase the likelihood of market
power either because strong competitors exist or because
the merging hospitals were sufficiently differentiated;
(2) the merger would allow the hospitals to reduce cost; or
(3) the merger would eliminate a hospital that otherwise
would probably have failed and left the market.
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CHECKPOINT 18.4
In the news
Intel will find refuge in the courts
The European Union recently fined Intel $1.45 billion
because it gave “loyalty discounts” to repeat customers,
presumably increasing Intel’s dominance in the
microprocessor business—called predatory pricing in the
United States.
Source: Wall Street Journal, June 2, 2009
Did Intel practice predatory pricing? If every morning you pick
up a coffee at Starbucks and it offers you a loyalty discount,
is that predatory pricing?
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CHECKPOINT 18.4
Solution
Predatory pricing is the setting of a low price with the aim of
driving competitors out of business and then setting the
monopoly price when the competitors are gone.
If the loyalty discount was intended to drive out AMD, Intel’s
competitor, then Intel’s practice was predatory pricing.
A loyalty discount at Starbucks isn’t predatory pricing
because the market for coffee is competitive.
Driving out one coffee outlet will not create monopoly.
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