Transcript 11 Monopolistic Competition and Oligopoly

Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
11
Monopolistic
Competition
and Oligopoly
End Show
11-1
Copyright 2008 The McGraw-Hill Companies
Chapter Objectives
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-2
• Characteristics of Monopolistic
Competition
• Why Monopolistic Competitors
Earn Only a Normal Profit in the
Long-Run
• Characteristics of Oligopoly
• How Game Theory Relates to
Oligopoly
• Why the Demand Curve of the
Oligopolist May Be Kinked
• Incentives and Obstacles to
Collusion Among Oligopolists
• Potential Positive and Negative
Effects of Advertising
Copyright 2008 The McGraw-Hill Companies
Monopolistic Competition
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-3
• Characteristics
–Small Market Shares
–No Collusion
–Independent Action
• Differentiated Products
–Product Attributes
–Service
–Location
–Brand Names and
Packaging
–Some Control Over Price
Copyright 2008 The McGraw-Hill Companies
O 11.1
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Monopolistic Competition
• Easy Entry and Exit
• Advertising
O 11.1
–Nonprice Competition
• Monopolistically
Competitive Industries
Key Terms
End Show
11-4
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Price and Output Determination
In Monopolistic Competition
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
• The Firm’s Demand
Curve
• The Short Run:
–Profit or Loss
• The Long Run:
–Only a Normal Profit
–Profits: Firms Enter
–Losses: Firm’s Leave
• Complications
Key Terms
–Product Variety
End Show
11-5
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G 11.1
Price and Output Determination
In Monopolistic Competition
Short-Run Profits
MC
Price and Costs
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
P1
A1
Economic
Profit
D1
MR = MC
MR
Key Terms
0
End Show
Q1
Quantity
11-6
ATC
Copyright 2008 The McGraw-Hill Companies
Price and Output Determination
In Monopolistic Competition
Short-Run Losses
MC
Price and Costs
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
A2
P2
Loss
D2
MR = MC
MR
Key Terms
0
End Show
Q2
Quantity
11-7
ATC
Copyright 2008 The McGraw-Hill Companies
Price and Output Determination
In Monopolistic Competition
Long-Run Equilibrium
MC
ATC
Price and Costs
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
P3=
A3
D3
MR = MC
MR
Key Terms
0
End Show
Q3
Quantity
11-8
Copyright 2008 The McGraw-Hill Companies
Monopolistic Competition
and Efficiency
Recall: P=MC=Minimum ATC
MC
Price and Costs
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
ATC
P3=
A3
P4
Price is Higher
D3
MR = MC
Excess Capacity at
Minimum ATC
0
Key Terms
MR
Q3
Q4
Quantity
Monopolistic Competition is Not Efficient
End Show
11-9
Copyright 2008 The McGraw-Hill Companies
Oligopoly
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
• Characteristics
–A Few Large Producers
–Homogeneous or
Differentiated Products
• Homogeneous Oligopoly
• Differentiated Oligopoly
–Control Over Price, But
Mutual Interdependence
• Strategic Behavior
–Entry Barriers
–Mergers
Key Terms
End Show
11-10
Copyright 2008 The McGraw-Hill Companies
Measures of Concentration
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
• Concentration Ratio
• Localized Markets
• Interindustry
Competition
• World Trade
–Import Competition
• Herfindahl Index
W 11.1
(%S1)2 + (%S2)2 + (%S3)2 + … + (%Sn)2
End Show
11-11
Copyright 2008 The McGraw-Hill Companies
Game Theory
Key Terms
RareAir’s Price Strategy
• 2 Competitors
• 2 Price
Strategies
• Each Strategy
Has a Payoff
Matrix
• Greatest
Combined
Profit
• Independent
Actions
Stimulate a
Response
High
Uptown’s Price Strategy
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Game Theory Model to Analyze
Behavior
A
$12
Low
B
$15
High
$12
C
$6
$6
D
$8
Low
$15
$8
End Show
O 11.2
11-12
Copyright 2008 The McGraw-Hill Companies
Game Theory
Key Terms
RareAir’s Price Strategy
• Independently
Lowered Prices
in Expectation
of Greater
Profit Leads to
the Worst
Combined
Outcome
• Eventually Low
Outcomes
Make Firms
Return to
Higher Prices
High
Uptown’s Price Strategy
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Game Theory Model to Analyze
Behavior
A
$12
Low
B
$15
High
$12
C
$6
$6
D
$8
Low
$15
$8
End Show
O 11.2
11-13
Copyright 2008 The McGraw-Hill Companies
Game Theory
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
•Role of Mutual
Interdependence
•Collusive Tendencies
– Collusion
•Incentive to Cheat
Key Terms
End Show
11-14
Copyright 2008 The McGraw-Hill Companies
G 11.2
Three Oligopoly Models
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-15
• Kinked Demand Curve
• Collusive Pricing
• Price Leadership
• Diversity of
Oligopolies
• Complications of
Interdependence
Copyright 2008 The McGraw-Hill Companies
Kinked-Demand Curve
Noncollusive Oligopoly
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
• Strategies
–Match Price Changes
–Ignore Price Changes
• A Combined Strategy
• Price Inflexibility
• The Kinked-Demand
Curve
Graphically…
End Show
11-16
Copyright 2008 The McGraw-Hill Companies
Kinked-Demand Curve
Noncollusive Oligopoly
Competitor and Rivals Strategize Versus Each Other
Consumers Effectively Have 2 Partial Demand Curves
and Each Part Has Its Own Marginal Revenue Part
e
P0
f
D2
Rivals Match g
Price Decrease
0
Q0
MR1
Quantity
MR2
Price and Costs
Rivals Ignore
Price Increase
Price
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
MC1
D2
P0
e
MR2
f
MC2
g
D1
D1
0
Q0
MR1
Quantity
Resulting in a Kinked-Demand Curve
to the Consumer – Price and Output
Are Optimized at the Kink
Key Terms
End Show
11-17
Copyright 2008 The McGraw-Hill Companies
Kinked-Demand Curve
Noncollusive Oligopoly
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-18
• Criticisms of the Model
–Doesn’t Explain How
Price Gets to the Kink
(P0)
–Oligopoly Prices Are Not
As Rigid During
Instability as the Model
Indicates
–Possibility of Price Wars
Copyright 2008 The McGraw-Hill Companies
MC
Price and Costs
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Cartels and Other Collusion
• Price and Output
–Collusion and Tendency
Toward Joint-Profit
Maximization
P0
ATC
A0
MR=MC
Economic
Profit
Key Terms
Effectively Sharing
The Monopoly Profit
D
MR
Q0
End Show
Quantity
11-19
Copyright 2008 The McGraw-Hill Companies
Cartels and Other Collusion
• Overt Collusion
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
–Cartels
–The OPEC Cartel
GLOBAL PERSPECTIVE
The 11 OPEC Nations Daily Oil Production, May 2006
Country
Saudi Arabia
Iran
Venezuela
UAE
Nigeria
Kuwait
Iraq
Libya
Indonesia
Algeria
Qatar
Barrels of Oil
9,099,000
4,110,000
3,233,000
2,444,000
2,306,000
2,247,000
1,903,000
1,500,000
1,451,000
894,000
726,000
Source: OPEC
11-20
Copyright 2008 The McGraw-Hill Companies
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
Cartels and Other Collusion
• Covert Collusion
–Tacit Understandings
• Obstacles to Collusion
–Demand and Cost
Differences
–Number of Firms
–Cheating
–Recession
–Potential Entry
–Legal Obstacles:
• Antitrust Law
End Show
11-21
Copyright 2008 The McGraw-Hill Companies
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
Price Leadership Model
• Leadership Tactics
• Infrequent Price
Changes
• Communications
• Limit Pricing
• Breakdowns in Price
Leadership:
–Price Wars
End Show
11-22
Copyright 2008 The McGraw-Hill Companies
Oligopoly and Advertising
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-23
• Advertising Prevalent in
Monopolistic
Competition and
Oligopoly
• Positive Effects of
Advertising
• Potential Negative
Effects of Advertising
Copyright 2008 The McGraw-Hill Companies
Oligopoly and Advertising
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
The Largest U.S. Advertisers, 2005
Company
Advertising Spending
Millions of $
Proctor and Gamble
General Motors
Time Warner
Verizon
AT&T
Ford Motor
Walt Disney
Johnson & Johnson
GlaxoSmithKline
DaimlerChrysler
$4609
4353
3494
2484
2471
2398
2279
2209
2194
2179
Source: Advertising Age
11-24
Copyright 2008 The McGraw-Hill Companies
Oligopoly and Advertising
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
World’s Top 10 Brand Names
GLOBAL PERSPECTIVE
Coca-Cola
Microsoft
IBM
General Electric
Intel
Nokia
Toyota
Disney
McDonalds
Mercedes-Benz
Key Terms
End Show
Source: Interbrand
11-25
Copyright 2008 The McGraw-Hill Companies
Oligopoly and Efficiency
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-26
• Productive and Allocative
Efficiency
P = MC = Minimum ATC
– Neither Exists
• Tendency to Share the
Monopoly Profit
• Qualifications
–Increased Foreign
Competition
–Limit Pricing
–Technological Advance
Copyright 2008 The McGraw-Hill Companies
Oligopoly in the Beer Industry
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
• Once Hundreds of Firms Now a
Very Small Group
• Demand Side Changes
– Taste Shifts to Lighter Beers of
Large Breweries
– Shift From Tavern-Tap
Consumption to Can or Bottles
• Supply Side Changes
– Technology Increased Minimum
Efficient Scale Creating a Barrier
to Entry
– National Brands Enjoy Cost
Advantages
• Consolidation of Firms into
Oligopoly
Key Terms
End Show
11-27
Copyright 2008 The McGraw-Hill Companies
Key Terms
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Key Terms
End Show
11-28
• monopolistic
competition
• product
differentiation
• nonprice
competition
• excess capacity
• oligopoly
• homogeneous
oligopoly
• differentiated
oligopoly
• strategic behavior
• mutual
interdependence
• concentration ratio
Copyright 2008 The McGraw-Hill Companies
• interindustry
competition
• import competition
• Herfindahl index
• game-theory model
• collusion
• kinked-demand
curve
• price war
• cartel
• tacit
understandings
• price leadership
Next Chapter Preview…
Monopolistic
Competition
Monopolistic
Competition
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
Technology, R&D,
And Efficiency
Key Terms
End Show
11-29
Copyright 2008 The McGraw-Hill Companies