Transcript Document

Imperfect Competition
1-Pure Monopoly
2-Monopolistic competition
3-Oligopoly
MICROECONOMICS 1
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1
Pure Monopoly
• There is only on seller in the market
• Market demand curve is downward sloping
• She can either change price or quantity in
order to maximize the profit
• In order to sell more , she should lower the
price
• She is facing the market demand individually
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Monopoly demand
Q = F(p) or P = F (q)
P
Unique inverse
b
P
a
P1
Q
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Q1
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Q3
Average and marginal revenue
R=p(q)q total revenue
MR=dR/dq=p+q(dp/dq)=p(1+(q/p)(dp/dq))=
p(1-1/ e ) e=absolute value of elasticity
p
dp/dq<0
MR<P
p=a-bq then q=(p-a)/b
D
MR
q
TR = aq- bq2 , then
MR = a – 2bq
p= a-bq
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q = (a-MR)/2b
q=(a-p)/b
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P=MR ;
q(Demand)=
2q(MR)
4
MR=P(1- 1/ιeι )
If Q=Q* , ιeι=1 , MR=0 , R(Q)=MAX
If PQ<Q* , ιeι>1 , MR>0 ,
If Q>Q* , ιeι<1 MR<0 ,
Monopolist will always
produce in the elastic
portion of the demand
curve
MR
P*
D = AR
Q*
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Q
5
e>1
e=1
Demand,
Demand, Total
Total Revenue
Revenue e<1
and
and Elasticity
Elasticity
demand
Max TR
TR
elasticity
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Profit maximization
cost function
•
•
•
•
П=p(Q)Q – C(Q) = TR(Q) – TC(Q)
dП/dQ = dTR(Q)/d(Q) – dTC(Q)/Q = 0
MR(Q) = MC(Q)
F.O.C.
MR>0 , Monopolist always choose a point on the
elastic portion of the demnad.
• dMR(Q)/dQ < dMC(Q)/dQ S.O.C.
• MC must cut MR from below
• If first and second order condition satisfies for
More than a point , the one which yield greater
profit will be chosen.
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Figure 1 and 2 satisfies the S.O.C. but 3 does not
MC
p
p
p
MC
MR
D
MR
D
D
MR
MC
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1
q
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q
3
q
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Profit maximization :
production function
•
•
•
•
•
П=TR(q) - r1x1 – r2x2
Q= h(x1,x2)
dП/dxi = MR(q)hi – ri = 0
MR(q)hi = ri
MRPxi= ri
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VMPxi = ri
• S.O.C. П11<0 , П22<0 ,
•
П11П22 – П212>0
• Пii = MR(q)hii + dMR(q)/dq hi2<0
• MR’(q)<-MR(q)hii/hi2=-rihii/hi3
F.O.C.
MC=ri/hi MC=MR
• MR‘ (q ) is negative for monopolist . So hii could be
positive ( MPxi is increasing) and monopolist may
produce where production function is not concave .(the
condition for concavity requires hii to be negative ).
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Price discrimination
• Selling at more than one price to increase
profit
• Buyers should be unable to buy from one
market and sell it in other one
• Personal services ; electricity , gas, water
• Saptially seperated markets, domestic and
export markets
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Price discrimination
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•
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П=R1(q1)+R2(q2)-C(q1+q2)
qi= Sale in the ith market
Ri(qi) = piqi revenue in the ith market
dП/dqi=MR(qi)-MC(q1+q2) = 0 i=1,2
MR(q1)=MR(q2)=MC(q1+q2)
P1(1-1/e1)=P2(1-1/e2)
Greater elasticity lower price
S.O.C. dП/dqi <0
dMRi(qi)/dq<dMC(q)dq i=1,2
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Perfectly discriminating
monopolist
The monopolist is able to subdivide her
market to such a degree that she could sell
each successive unit of her commodities for
the maximum amount that consumers are
willing to pay.
The consumers should have different
elasticity's of demand for the monopolist
output.
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
Q*
П = 0F(Q) -
Q*
 MC(Q)
0
dП/dQ=0
F(Q) – MC(Q) = 0
P
F.O.C.;
Marginal price =Marginal cost
S .O . C . ;
Slope of demand <Slope of marginal cost
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Multi plant monopolist
• Output (q) will be produced in two separate plant
(i)
• qi = production in plant i
• Output of Plants will be sold in a single market.
• П = R(q1+q2) – C1(q1) – C2(q2)
• Ci(qi) = cost of production in plant i
• dП/dq1= MR(q1+q2) – MC(q1) = 0
• dΠ/dq2 = MR(q1+q2) – MC(q2) = 0
• MC(q1) = MC(q2) = MR(q1+q2) F.O.C.
• dMC(qi)/dqi>dMR(q1+q2)/dqi
S.O.C.
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Multi product monopolist
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•
Two distinct product
Q1=F1(p1,p2)
Q2=F2(p1,p2)
P1=f1(q1,q2)
p2=f2(q1,q2)
R1(q1,q2)=p1q1
R2(q1,q2)=p2q2
Π=R1(q1,q2) + R2(q1,q2) - C1(q1) - C2(q2)
dΠ/dq1=dR1/dq1+dR2/dq1 – MC1(q1)=0
dΠ/dq2=dR1/dq2 +dR2/dq2 – MC2(q2)=0
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Multi product monopolist
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•
•
•
•
dR1/dq1+dR2/dq1=MC1(q1)
dR1/dq2+dR2/dq2=MC2(q2)
If q1 increase by one unit and q1 is a
substitute for q2 (dR2/dq1<0) , then
Revenue increase by (dR1/dq1+dR2/dq1)
Cost increase by MC(q1)
For profit maximization these two should
be the same for one unit increase in q1
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Monopoly taxation
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•
•
•
•
1- Lump-sum tax
Π=R(q)-C(q)-T
dΠ/dq=MR(q)-MC(q)=0 MR=MC
Same output as before the tax
Only monopoly profit will decrease
2-Profit tax 0<t<1
Π=R(q)-C(q)-t{R(q)-C(q)}=(1-t){R(q)-C(q)}
dΠ/dq=(1-t){MR(q)-MC(q)}=0
MR=MC
Same output as before the tax
Only monopoly profit will decrease
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Monopoly taxation continued
•
•
•
•
•
•
•
•
3- specific sale tax T=αq
Π=R(q)-C(q)-αq
dΠ/dq=MR(q)-MC(q) -α =0
Profit maximization condition will change
dq/dα=1/(dMR(q)/dq-dMC(q)/dq)
(dMR(q)-dMC(q))/dq<0 S.O.C.
dq/dα<0
Increase in tax rate(α) will lead to decrease in
quantity produced and Increase in price
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Monopoly taxation cont.
•
•
•
•
•
•
T = sR(q) 0<s<1
Π=R(q)-C(q)-sR(q)=(1-s)R(q)-C(q)
dΠ/dq=(1-s)MR(q)-MC(q)=0
(1-s)MR(q)=MC(q)
Taking total differential
dq/ds=MR(q)/{(1-s)(MR’(q)-MC’(q)} <0
By S.O.C. < 0
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Revenue maximizing monopoly
Max R(q)
s.t. Π=R(q)-C(q) ≥Π0
L= R(q) +λ{R(q) - C(q) – Π0}
dL/dq = MR(q) + λ {MR(q)-MC(q)} ≤ 0, q dL/dq=0
dL/dλ=R(q) - C(q) – Π0 ≥ 0 , , λdL/dλ= 0
If Π0 =Π* =maxΠ
then MR(q) – MC(q) = 0 q=q*
If Π0> Π* no solution
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TC
TR is max
C,
TR
Profit when
revenue is
maximized
TR
MR=MC
max Π = Π*
q=q*
MR>0
MC>0
q*
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qm (TR is max)
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q
25
Revenue maximizing cont.
• If Π0<Π* then Π should be greater than or equal
to Π0 ,
• 1-When Π0 is less than profit at q=qm(when TR is
maximized) , the solution is where TR is
maximized [ MR =0 (q=qm)]
• dL/dq=MR(q)+λ{MR(q)-MC(q)} ≤ 0
• If MR =0 so maximized TR is the solution, so
there is no constraint., so λ=0
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Revenue maximizing cont.
2- if Π is greater than the profit where
q=qm(TR is max) and is less than the
maximum profit ,the solution for q is when
q*<q<qm .
Profit tax will alter the output of revenue
maximizing monopoly ;
Max R(q) s.t. (1-t){R(q)-C(q)}=Π0
Taking total differential ;
dq/dt= {R(q)-C(q)}/(1-t){MR(q)-MC(q)}<0
By S.O.C MR<M.C
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Inefficiency of Monopoly:
MC(y*+1) < p(y*+1), so both seller and buyer
could gain if (y*+1) level of output is produced.
Market is Pareto inefficient
$/output
unit
p(y*)
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p(y)
CS
MC(y)
PS
y*IMPERFECT COMPETITION
MR(y)
y
28
Inefficiency of Monopoly:
DWL = gains from trade not achieved
$/output unit
p(y)
p(y*)
DWL
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y*
MR(y)
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MC(y)
y
29
Inefficiency of Monopoly
Inefficiently low quantity, inefficiently high price
$/output
unit
p(y)
p(y*)
p(ye)
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MC(y)
DWL
y*
ye
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MR(y)
y
30
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Inefficiency resulting from two-price
The Efficiency
Losses
from
monopoly
is lower than
one-price
Single-Price
monopoly and
Z<WTwo-Price Monopoly
Efficiency loss
Z< W
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Welfare loss from monopoly pricing;
wThe Welfare Loss from
Comparing to perfect competition
a Single-Price Monopoly
Loss = (Π+s1+s2)–s2
Monopoly profit
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Monopsony
• The sole purchaser in the market
• Producer of q is the sole purchaser in the
labor market and sell her output in the
competitive market.
• q=h(x)
q=output
x=input
• r=price of x , r=g(x) , g’>0 R(q)=pq
• TC= rx = x g(x)
• Marginal cost of labor = d(TC)/dx= g(x) +xg’(x)
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monopsony
•
•
•
•
•
Π=TR – TC= ph(x) – g(x)x
dΠ/dx=ph’(x) – g(x) – xg’(x)=0
Ph’(x)= g(x) +xg’(x)
F.O.C.
VMPx=MCx(marginal factor cost)
d2Π/dx2=ph’’(x) – 2g’(x) – xg’’(x)<0 S.O.C.
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MCx=dc/dx
C
g(x)=supply x
r1
r0
VMPx
x0
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x1
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x
47
Monopsony
If monopsony is a monopolist in the output
market , p=F(q)
q=h(x) r=g(x)
Π=pq – g(x)x =F(q) h(x) – xg(x)
dΠ/dx = [ dF(q)/dq ] [ dq/dx ] h(x) +
[ dh(x)/dx ] F(q) – [ dg(x)/dx ] x – g(x) =0
[dh(x)/dx ] { [dF(q)/dq] (h(x)] + F(q) } =
VMPx
g(x) + x { dg(x)/dx }
MCx
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Monopolistic competition
Number of sellers is sufficiently large
that the actions of an individual seller have
no perceptible influence upon her
competitors.
Each seller has a negatively sloped
demand curve for her distinct product .
Pk=Ak – akqk – Σi bkiqi
i≠k
dpk/dqi= - bki <0
i= 1,,,,n
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Monopolistic competition
•
•
•
•
If bki=b , ak=a , Ak=A , Ck(qk)=C(qk)
Pk = A – aqk – bΣqi
i=1…..n
Πk=qk(A – aqk – bΣqi) – C(qk) i≠k
Representative firm assumes that when
she maximizes profit ,the other fellows do
not change their output level ,so she can
move along her individual demand curve .
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Monopolistic competition
•
•
•
•
MR = MC
FOC
A – 2aqk – b Σqi = MC(qk) i= 1,,,,n
dMC/dq>dMR/dq
S.O.C.
But the other firms will follow the action of the
representative firm and do the identical variation
• The representative firm can not move along her
individual demand curve based upon her
assumption about the other firms.
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Monopolistic competition
• She is forced to move along the effective
demand curve , assuming that the others
will do the same action ;
• So replace qk=qi in pk=A - aqk – bΣin qi
• effective demand for the firm
;
Pk=A-[a+(n-1)b]qk
• which accounts for the simultaneous move
of all other firms (steeper slope).
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Monopolistic competition
Is a function of qk and
n only
Competitor’s
The
Monopolistic
The
The Monopolistic
Monopolistic Competitor’s
Competitor’s
Two
Demand
Curves
Two
Demand
Curves
Two
Demand
Demand
Curves
Curves
Initial position
Effective
demand
curve
A function of
qk and qi
Individual
demand curve
Change in the quantity
is restricted for a firm
on the effective
demand curve
,because of rival
competition.
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Monopolistic competition
short run equilibrium
• The industry and an individual firm reaches to an
equilibrium when all firms maintain MR=MC
• pk=A- aqk – bΣin qi
• MR(q) = A – 2aqk – bΣin qi =MC(qk)
• one equations and n unknowns (qi)
• All firms act the same ( qi=qk)
• A - [2a+(n-1)b]qk=MC(qk)
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In the short run the number of firms (n) is known ,so
the MR=MC equation could be solved for qk as it is
shownEquilibrium
in the following figure;
-Run
for the
Maximum
profit
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output of the
representative
firm k when
profit is
maximized
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Monopolistic competition
Long run equilibrium
Positive profit ,free entry , dd shifts to the
left ,profit goes back to zero.
Π=qk(A – aqk – bΣin qi) – C(qk),
qk=qi
Πk=Aqk - [a+(n-1)b]qk2 - C(qk) =0 (1)
A – 2[a + (n – 1)b]qk = MC(qk)
(2) (MR=MC)
Two equations two unknown; (n,qk) .
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Monopolistic competition long run equilibrium
Monopolistic
Long-Run Equilibrium in the
competition price
Chamberlain Model
and quantity
Output of the
Min LAC
representative
Firm k
Pc
c
Perfect
competition
price and
quantity
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Qc
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Oligopoly
• The result of any move on the part of a
oligopolies depend upon the reactions of
his rivals.
• General price-quantity relationship can not
be defined, because he can not control the
output of other firms. It depends to the
assumption which we make about the
behavior of his rivals.
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Oligopoly
• If dΠi/dqj is negligible we will have perfect
competition or monopolistic competition.
• If dΠi/dqj is noticeable we will have
duopolistic or oligopolist
• Different assumptions about the behavior
of the rivals leads to different models of
oligopoly . these assumptions may be as
follows ;
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1- Quasi-competitive solution
Two firms produce homogenous product q.
P=F(q1+q2); Demand function
qi = output levels of firm i=1,2
TR1=q1F(q1+q2)
TR2=q2F(q1+q2)
Π1=TR1(q1,q2) – TC1(q1)
Π2=TR2(q1,q2) – TC2(q2)
Each follows the competitive solution by equating
price to marginal cost , or P=MC, price in the
market could be determined in any way.
P=F(q1+q2) = MC(q1)
P=F(q1+q2) = MC(q2)
Two equation two unknowns q1 q2
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2- Collusion solution
• All the firms are under a unique control
forming a monopoly .
• P=F(q1+q2)
• TR1=q1F(q1+q2)
• TR2=q2F(q1+q2)
• TR(q1+q2)= Total revenue= TR1+TR2=
• (q1+q2)F(q1+q2)
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2-Collusion solution
•
•
•
•
•
•
Π=Π1+Π2=TR(q1+q2)-TC1(q1)-TC2(q2)
dΠ/dq1 = dTR(q1+q2)/dq1 – MC1(q1)=0
dΠ/dq2 = dTR(q1+q2)/dq2 – MC2(q2)=0
MR(q1+q2)=MC1(q1)
MR(q1+q2)=MC2(q2)
Two equations two unknowns q1 ,q2
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Cournot solution
• Homogenous product
• Classical solution; quantity produced by the rival is
invariant with respect to the firm’s output level .
• P=F(q1+q2) demand curve
• TRi = qiP = qi F(q1+q2)
i= 1,2
• Π1=TR1(q1,q2) – TC1(q1)
• Π2=TR2(q1,q2) – TC2(q2)
• dTRi /dqi = P+(dp/dq)qi
dp/dq <0 q=q1+q2
• The firm with greater output will have smaller MR
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Cournot solution
•
•
•
•
•
•
dΠ1/dq1=dTR1/dq1–dTC1(q1), MR1=MC1
dΠ2/dq2=dTR2/dq2–dTC2(q2), MR2=MC2
Satisfying the second order coditioin;
q1=f1(q2) 1th reaction function
q2=f2(q1) 2th reaction function
The reaction functions shows for any
value of qi(i=1,2), the corresponding value
of qj(j=2,1) which maximizes Πj.
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Cournot solution
q2
q1=f1(q2)
Reaction
functions
q2*
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q1
*
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q2=f2(q1)
q1
65
Cournot solution
• In some cases the cournot solution coincides
with the quasi-competitive
• P=aqb , q=q1+q2…+qn ,
• Πi = pqi – TCi = aqb qi – TCi
dΠi/dqi= d(aqb qi)/dqi - MC =0 , q=nqi , MC=c
qi= c1/b/n(b-1)/b(an+ab)1/b
• If n is infinite then
qi=(c/a)1/b
• P=MC , aqb=c ,
q=(c/a)1/b
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Cournot solution
• It is expected to see the following result given
the same conditions ;
• Qcollusion<Qcournot<Qquasi-competitive
• Pquasi-competitive<Pcournot<Pcollusion
• Πquasi-competitive<Πcournot<Πcollusion
• With the appropriate agreement on how to
distribute the industry profit, both firms would be
better off with collusion comparing to other
cases.
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Stackelburg solution
•
•
•
•
Π1=h1(q1,q2)
Π2=h1(q1,q2)
dΠ1/dq1=dh1/dq1+(dh1/dq2)(dq2/dq1)
dΠ2/dq2=dh2/dq2+(dh2/dq1)(dq1/dq2)
It is rather unrealistic to assume that each firm
assumes that his decision do not affect his rival
behavior,instead it is more likely that his rival will
adjust his behavior according to a reaction
function (dqi/dqj)
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Stakelburg solution
• Assumption about dqi/dqj(leadership follower
ship model);
• A follower obeys his reaction function and adjust
his output to maximize his profit , given the
quantity decision of his rival whom he assumes
to be a leader.
• A leader does not obey his reaction function ,
the leader will maximize his profit given the
reaction function of his rival whom he assumes
to be a follower.
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Stackelberg solution
• Suppose that firm 1 is leader and 2 is follower;
• Firm 1 assumes that 2’s reaction function (f2(q1))
is valid and substitute 2’s reaction function in his
profit function ;
• Π1=h1[q1,f2(q1)]
• Then he maximizes his profit function with
respect to his output , q1.when q1 is determined,
firm 2 will find his output level (q2) from his
reaction function , q2=f2(q1)
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Stackelberg solution
•
•
•
•
•
1 is leader ,2 is follower , determinate.
2 is leader ,1 is follower , determinate.
1 is follower, 2 is follower, cournot .
1 is leader , 2 is leader , disequilibrium,
Most frequent result is the negotiation
between the two when both see
themselves as leaders.
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Market share solution
• Another form of reaction function;
• Firm 2 wants to keep a fixed share of
k=q2/(q1+q2) in the market.
• P1=F1(q1,q2) inverse demand for firm 1
• Π1=q1F1(q1,q2) – C1(q1)
• Π1=q1F1(q1,kq1/(1-k)) – C1(q1)
• dΠ1/dq1=0
q1 , q2 could be found
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Kinked demand curve
• Conditions ;
• 1- infrequent price changes
• 2- firms do not change their price-quantity
combinations in response to small shifts of their
cost curves.
• Price decrease will be followed by rivals but
price increase would not .Firm would confront
with demand curve with different elasticity's .
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Kinked demand curve
• So marginal revenue curve will be broken.
• Variation of marginal cost in the broken
area of marginal revenue does not change
the price.
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Kinked demand curve
p
1
Demand for price increase
D
Initial fixed
price
D
MC
1
Po
Demand for price
decrease
MR
D
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COMPETITION
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0
D
q
1
75
Kinked demand curve
• An example ;
• Demand and cost function of the
duopolistic model are as follows
• P1=100 – 2q1 – q2
C1 = 2.5q12
• P2=95 – q1 – 3q2
C2=25q2
• Currently established price and quantity
• p1=70 , q1=10 , p2=55 , q2=10
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Kinked demand curve
• 1- if firm 1 increase his price ,firm 2 would leave
his own price unchanged at p2=55.
p2=55, (P2=95 – q1 – 3q2) → q2=(40–q1)/3,
P1=100 – 2q1 – q2 , p1=(260 - 5q1)/3
• So for p1>70 , q1<10 ;
• p1=(260 - 5q1)/3, MR1=(260-10q1)/3
• If q1=10 then MR1=53.33
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Kinked demand curve
When P1=100 – 2q1 – q2 , q1=q2 =10
If firm 1 reduce the price , firm 2 will follow in order
to maintain his equalshare out of the market ,
(q1=q2).
P1=100 – 3q1 MR1=100 – 6q1 (for P1<70 , q1 >10)
In this case when q1=10 , then MR1=40
initial position; p1=70 , MC1 =5q1=50, so;
MR1 = 40 < MC1 =50 <MR1 = 53.33.
Reduction of marginal cost by more than 10 units
or increase in the marginal cost by more Than
3.33 units is needed to change the price .
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Bilateral monopoly
• Single buyer, single seller
• It is not possible for the seller to behave as monopolist
,because she can not exploit a buyer’s demand function
.The buyer is monopsonist and does not have a demand
function and she wants to exploit a point on the seller
supply curve.
• It is not either possible for the buyer to behave as
monopsonist , because the buyer can not exploit an
input supply function. The seller is a monopolist and
does not have a supply function and she wants to
exploit a point on the buyer’s demand function.
• Either one of them should dominate or they may
cooperate or market mechanism breaks down.
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Bilateral monopoly
2- Reference solution
Market for q2 is the one which will be considered
Seller of q2 buys input x, from a competitive
market with a price equal to r, for the production
of q2 , [q2=h(x) or x=H(q2) ] and sell q2 with a
price equal to p2 .
Buyer buys q2 with a price equal to p2 and use it as
an input to produce q1 and sell q1 in the
competitive market with price equal to P1
q1=h(q2) .
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.
Bilateral monopoly
• A- Monopoly solution
• Seller of q2 dominate the market and force
buyer of q2 to accept whatever price he
set.
• Buyers profit=Πb=p1q1–p2q2
• Πb = p1h(q2) - p2q2
• dΠb/dq2=p1dh(q2)/dq2 – p2 =0
• P2=p1h’(q2)= VMP(q2)
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Bilateral monopoly
• The monopolist substitute p2=p1h’(q2) in his
profit function to find out how much q2 should
he produced:
• Πs= p1h’(q2) q2 – rx= p1h’(q2)q2–rH(q2)
• dΠs/dq2 = 0
• p1[h’(q2)+h’’(q2)q2] – rH’((q2)=0
• p1[h’(q2)+h’’(q2)q2] = rH’((q2)
• MR(q2)=MC(q2)
Point s ; (p2s , q2s),
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MCI
Bilateral monopoly
p
2
p2=rH’(q2) = MC(q2)=s(q2)
P2s
B
S
C
p2c
p1 h’(q2)=VMP(q2)=D(q2)
p2b
MR(q2)
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q2c
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2
83
Bilateral monopoly
•
•
•
•
•
2-Monopsony solution
Buyers dominates the market
Sellers profit= Πs =p2q2 – rx = p2q2 – rH(q2)
dΠs/dq2=p2 – rH’(q2) = 0
p2 = rH’(q2)
• price set by buyer=marginal cost of producing q2
• Buyer’s profit Πb= p1q1 – p2q2 =
• = p1h(q2) - rH’(q2)q2
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Bilateral monopoly
dΠb / dq2=p1h’(q2)-r[H’(q2)+H’’(q2)q2]=0
p1h’(q2) = r[H’(q2)+H’’(q2)q2]
VMP(q2 in producing q1)=MC of buying q2 for buyer
Point B in the figure, q2=q2b, p2=p2b
3 - Seller and buyer are both price taker ( quasi
competitive solution )
Supply and demand function are effective ;
point c , p2=p2c , q2=q2c
P1h’(q2c)=rH’(q2c)
VMP(q2 in producing q1)=MC(q2) for seller
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Bilateral monopoly
• As a rule ; q2c>q2b , q2c>q2s , but
• Relation between q2b and q2s is not kwon . It
depends to the position (elasticity) of supply and
demand curves.
• In general we expect to have the following
results given the same conditions ;
• P2b<P2c<P2s
• Πss> Πsc> Πsb seller’ s profit in three cases
• Πbs< Πbc< Πbb buyer’s profit in three cases
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Bilateral monopoly
• 4 - Collusion and bargaining
• This happens to reach to an agreement on
unique price and quantity .This includes
two process;
• 1- determining (q) such that their joint
profit is maximized.
• 2- determining (P) in order to distribute the
profit
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Bilateral monopoly
•
•
•
•
Π=Πb+Πs=[p1h(q2)–p2q2]+[p2q2-rH(q2)]
dΠ/dq2=p1h’(q2) – rH’(q2)=0
p1h’(q2)=rH’(q2)
(q2=q2c)
VMP(q2 in producing q1) = Marginal cost of q2 for
seller
• Quasi-competitive price does not necessarily
follow from a collusive solution.
• The seller wants to put the price as high as
possible.
• Buyer wants to put the price as low as possible.
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Bilateral monopoly
• Different solutions can be found for price (p2);
• 1- P** <P2<P*
• Price that force the buyer’s profit to zero = p*=
[p1h(q2c)]/q2c
• Price that force the seller’s profit to zero = p**=
[rH(q2c)]/q2c
• 2- Buyer can do no worse than monopoly
situation and seller can do no worse than
monopsony solution.
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Bilateral monopoly
• Buyer’s profit in monopoly situation=
• P1h(q2c) – p2q2c = Πbs
• P’2=[p1h(q2c) – Πbs] /q2c
•
•
•
•
•
•
Seller’s profit in monopsony situation=
p2q2c – rH(q2c) = Πsb
P’’2=[rH(q2c) + Πsb]/q2c
P’’2<P2<P’2
In each case the determination of p2 depends
upon the relative power of the bargaining
process.
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• CAN MONOPOLY BE DEFENDED?
• Monopoly and Economies of Scale
• Because monopoly producers are often supplying
goods and services on a very large scale they may be
better placed to take advantage of economies of scale
- leading to a fall in the average total costs of
production. These reductions in costs will lead to an
increase in monopoly profits but some of the gains in
productive efficiency might be passed onto consumers
in the form of lower prices. The effect of economies of
scale is shown in the diagram.
• As shown in the following figure economies of scale
provide potential gains in economic welfare for both
producers and consumers.
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• .
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•
•
•
•
Monopoly and Innovation (Research
and Development)
How are the supernormal profits of monopoly used? Is consumer
surplus of equal value to producer surplus?
Are large-scale firms required to create a comparative advantage in
global markets? Some economists argue that large-scale firms are
required to be competitive in international markets.
An important issue is what happens to the monopoly profits both in
the short run and the long run. Undoubtedly some of the profits will
be distributed to shareholders as dividends. This raises questions of
equity. Some low income consumers might be exploited by the
monopolist because of higher prices. And, some of their purchasing
power might be transferred via dividends to shareholders in the
higher income brackets - thus making the overall distribution of
income more unequal.
However some of the supernormal profits might be used to invest
in research and development programs that have the potential to
bring dynamic efficiency gains to consumers in the markets. There is
a continuing debate about whether competitive or monopolistic
markets provide the best environment for high levels of
research spending.
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Domestic monopoly but
international competition
• A firm may have substantial domestic monopoly
power but face intensive competition from
overseas producers. This limits their market
power and helps keep prices down for
consumers. A good example to use here would
be the domestic steel industry. Corus produces
most of the steel manufactured inside the UK but
faces intensive competition from overseas steel
producers.
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Contestable markets!
Contestable market theory predicts that
monopolists may still be competitive even
if they enjoy a dominant position in their
market.
Their price and output decisions will be
affected by the threat of "hit and run entry"
from other firms if they allow their costs to
rise and inefficiencies to develop.
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