Transcript Monopolistic Competition and Oligopoly

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Monopolistic Competition and
Oligopoly
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Monopolistic Competition
• Relatively large number of sellers
• Differentiated products
• Easy entry and exit
• Advertising
LO1
9-2
Price and Output in Monopolistic Competition
• Demand is highly elastic
• Short-run profit or loss
• Produce where MR = MC
• Long-run normal profit
• Entry and exit
• Inefficient
• Product variety
LO2
9-3
The Short Run: Profit or Loss
Price and Costs
MC
ATC
P1
A1
Economic
Profit
D1
MR = MC
MR
0
Q1
Quantity
LO2
9-4
The Short Run: Profit or Loss
Price and Costs
MC
ATC
A2
P2
Loss
D2
MR = MC
MR
0
Q2
Quantity
LO2
9-5
The Long Run: Only a Normal Profit
MC
Price and Costs
ATC
P3= A3
D3
MR = MC
MR
0
Q3
Quantity
LO2
9-6
Monopolistic Competition: Efficiency
• Inefficient
• Productive inefficiency
• P > ATC
• Allocative inefficiency
• P > MC
LO2
9-7
Monopolistic Competition: Efficiency
P = MC = min ATC for pure competition (recall)
Price and Costs
MC
ATC
P3= A3
P4
Price is lower
D3
MR = MC
Excess capacity at
minimum ATC
0
Q3
MR
Q4
Quantity
Monopolistic competition is not efficient
LO2
9-8
Product Variety
• The firm constantly manages price,
•
LO2
product, and advertising
• Better product differentiation
• Better advertising
The consumer benefits by greater
array of choices and better products
• Types and styles
• Brands and quality
9-9
Oligopoly
• A few large producers
• Homogeneous or differentiated
•
•
•
LO3
products
Limited control over price
• Mutual interdependence
• Strategic behavior
Entry barriers
Mergers
9-10
Game Theory Overview
• Oligopolies display strategic pricing
behavior
• Mutual interdependence
• Collusion
• Incentive to cheat
• Prisoner’s dilemma
LO4
9-11
Game Theory Overview
LO4
High
Uptown’s Price Strategy
• 2 competitors
• 2 price strategies
• Each strategy has a
payoff matrix
• Greatest combined
profit
• Independent
actions stimulate a
response
RareAir’s Price Strategy
A
$12
Low
B
$15
High
$12
C
$6
$6
D
$8
Low
$15
$8
9-12
Game Theory Overview
LO4
High
Uptown’s Price Strategy
• Independently
lowered prices in
expectation of
greater profit leads
to worst combined
outcome
• Eventually low
outcomes make
firms return to
higher prices
RareAir’s Price Strategy
A
$12
Low
B
$15
High
$12
C
$6
$6
D
$8
Low
$15
$8
9-13
Kinked-Demand Theory
• Noncollusive oligopoly
• Uncertainty about rivals’ reactions
• Rivals match any price change
• Rivals ignore any price change
• Assume combined strategy
• Match price reductions
• Ignore price increases
LO5
9-14
Kinked-Demand Curve
MC1
D2
e
MR2
P0
MC2
f
g
D1
Q0
LO5
MR1
9-15
Kinked-Demand Curve
• Criticisms
• Explains inflexibility, not price
• Prices are not that rigid
• Price wars
LO6
9-16
Price Leadership Model
• Price leadership
• Dominant firm initiates price
•
•
LO6
changes
• Other firms follow the leader
Use limit pricing to block entry of new
firms
Possible price war
9-17
Collusion
• Cartel
• Overt collusion
• Covert collusion
• Joint-profit maximization
LO6
9-18
Collusion
Price and Costs
MC
P0
ATC
A0
MR=MC
Economic
profit
Q0
LO6
D
MR
Quantity
9-19
Overt Collusion
• Cartels: a group of firms or nations
•
•
LO6
that collude
• Formally agree to the price
• Set output levels for members
Collusion is illegal in the United
States
OPEC
9-20
Obstacles to Collusion
• Demand and cost differences
• Number of firms
• Cheating
• Recession
• New entrants
• Legal obstacles
LO6
9-21
Oligopoly and Advertising
• Prevalent to compete with product
development and advertising
• Less easily duplicated than a price
change
• Financially able to advertise
LO7
9-22
Positive Effects of Advertising
• Low-cost way of providing information
•
•
•
LO7
to consumers
Enhances competition
Speeds up technological progress
Can help firms obtain economies of
scale
9-23
Oligopoly and Advertising
The Largest U.S. Advertisers, 2010
Company
Procter & Gamble
Advertising Spending
Millions of $
$3124
General Motors
2131
AT&T
2093
Verizon
1823
News Corp.
1368
Pfizer
1229
Time Warner
1194
Johnson & Johnson
1140
Ford Motor
1132
L’Oreal
1112
Source: Advertising Age, www.adage.com
LO7
9-24
Negative Effects of Advertising
• Can be manipulative
• Contains misleading claims that
•
LO7
confuse consumers
Consumers pay high prices for a
good while forgoing a better, lowerpriced, unadvertised version of the
product
9-25
Global Snapshot
The World’s Top 10
Brands
Coca-Cola
IBM
Microsoft
Google
General Electric
McDonald’s
Intel
Apple
Disney
Hewlett-Packard
LO7
9-26
Oligopoly and Efficiency
• Oligopolies are inefficient
• Productively inefficient P > min ATC
• Allocatively inefficient P > MC
• Qualifications
• Increased foreign competition
• Limit pricing
• Technological advance
LO7
9-27
Oligopoly in the Beer Industry
• The beer industry is now an oligopoly
• Changes in demand
• Change in tastes
• Consumed at home and mass
•
LO2
produced
Changes in supply
• Technological advance
• Economies of scale
9-28