Transcript REVIEW Firm Behavior In Different Market Structures

CHAPTER 23
MONOPOLISTIC COMPETITION
AND OLIGOPOLY
FOUR MARKET MODELS
Pure Competition
Market Structure Continuum
FOUR MARKET MODELS
Imperfect Competition
All Markets that are
Not Purely Competitive
Pure
Competition
Market Structure Continuum
FOUR MARKET MODELS
Pure Monopoly
Pure
Competition
Market Structure Continuum
FOUR MARKET MODELS
Monopolistic Competition
Pure
Competition
Pure
Monopoly
Market Structure Continuum
FOUR MARKET MODELS
Oligopoly
Pure
Competition
Monopolistic
Competition
Pure
Monopoly
Market Structure Continuum
FOUR MARKET MODELS
Monopolistic Competition:
- Relatively Large Number of Sellers
- Differentiated Products
- Easy Entry and Exit
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
FOUR MARKET MODELS
Oligopoly:
- A Few Large Producers
- Homogeneous or Differentiated Products
- Control Over Price, But Mutual
Interdependence
- Strategic Behavior
- Entry Barriers
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
Comparing the Four Market
Forms
• Perfect competition and pure monopoly
are uncommon in reality.
• Many monopolistically competitive firms
exist.
• Oligopoly firms account for the largest
share of the economy’s output.
Comparing the Four Market
Forms
• In equilibrium, MC = MR for the profitmaximizing firm under any market form.
• In the equilibrium of the oligopoly firm, MC
may be unequal to MR.
Comparing the Four Market
Forms
• Perfectly competitive firm and industry
theoretically have efficient allocation of
resources.
• Monopoly and monopolistic competition
are likely to have inefficient allocation of
resources.
• Under oligopoly, almost anything can
happen, it is impossible to generalize
about its vices or virtues.
Price and Costs
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
MC
Expect New Competitors
ATC
P1
AC1
Short-Run
Economic
Profits
D
MR
Q1
Quantity
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
Price and Costs
MC
ATC
AC2
P2
Short-Run
Economic
Losses
D
MR
Q2
Quantity
Price and Costs
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
Long-Run Equilibrium MC
Normal
Profit
Only
ATC
P3
= AC3
D
MR
Q3
Quantity
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Price
The firm’s demand and
marginal revenue curves
D1
Quantity
MR1
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Price
The rival’s demand and
marginal revenue curves
D2
D1
Quantity
MR1
MR2
KINKED DEMAND THEORY:
Price
NONCOLLUSIVE OLIGOPOLY
Rivals tend to
follow a price cut
D2
D1
Quantity
MR1
MR2
KINKED DEMAND THEORY:
Price
NONCOLLUSIVE OLIGOPOLY
Rivals tend to
follow a price cut
or ignore a
price increase
D2
D1
Quantity
MR1
MR2
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Price
Effectively creating
a kinked demand curve
D2
D1
Quantity
MR1
MR2
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Price
Effectively creating
a kinked demand curve
D
Quantity
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Effectively creating
a kinked demand curve
Price
MC1
MR2
MC2
D
Quantity
MR1
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
Profit maximization
MR = MC occurs
at the kink
Price
MC1
MR2
MC2
D
Quantity
MR1
KINKED DEMAND THEORY:
NONCOLLUSIVE OLIGOPOLY
This behavior can set
off a price war.
Price
MC1
MR2
MC2
D
Quantity
MR1
Price and costs
CARTELS AND OTHER COLLUSION
Colluding Oligopolists Will
Split the Monopoly Profits
Economic
Profit
MC
P0
ATC
A0
D
MR = MC
MR
Q0
Using Game Theory
• Game theory can be used to describe a game
when:
– There are rules which govern actions;
– There are two or more players;
– There are choices of action where strategy
matters;
– The game has one or more outcomes;
– The outcome depends on the strategies
chosen by all players, i.e., there is
strategic interaction.
Advertising Game
COMPANY Y
Don’t Adv.
COMPANY X
Advertise
Don’t Adv.
10,10
2,15
Advertise
15,2
7,7
Dominant strategies: Strategy 1 dominates Strategy
2 if every payoff from 2 is dominated by the respective
payoff from 1.
Nash equilibrium: a set of strategies, one for each
player, such that no player has an incentive (in terms
of improving his own payoff) to deviate from his
strategy, i.e., each player can do no better given what
the opposing player(s) does.