Transcript Micro Ch 11 - 19e - use this one

11
Monopolistic Competition and
Oligopoly
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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
and Efficiency
Oligopoly
Game Theory
Three Oligopoly
Models
Kinked Demand
Curve
Cartels and
Other Collusion
Price
Leadership
Model
Oligopoly and
Efficiency
Last Word
FOUR MARKET MODELS
Monopolistic Competition:
•Relatively Large
Number of Sellers
•Differentiated Products
•Easy Entry and Exit
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Key Terms
Market Structure Continuum
End Show
11-3
Copyright 2008 The McGraw-Hill Companies
Monopolistically Competitive
• Industry concentration
• Measured by:
• Four-firm concentration ratios
• Percentage of 4 largest firms
4-Firm CR =
Output of four largest firms
Total output in the industry
• Herfindahl index
• Sum of squared market shares
HI = (%S1)2 + (%S2)2 + (%S3)2 + …. +
(%Sn)2
LO1
11-4
Low Concentration Industries
(1)
Industry
(2)
4-Firm
Concentration
Ratio
(3)
Herfindahl
Index
(1)
Industry
(2)
4-Firm
Concentration
Ratio
(3)
Herfindahl
Index
14
114
Asphalt paving
25
207
Metal windows and
doors
Plastic pipe
24
262
Women’s dresses
13
84
Textile bags
24
263
Ready mix concrete
11
63
Bolts, nuts, and
rivets
24
205
Wood trusses
10
50
Plastic bags
23
240
Stone products
10
59
Quick printing
22
319
Metal stamping
8
31
Textile machinery
20
206
Wood pallets
7
24
Sawmills
18
117
Sheet metal work
6
25
Jewelry
16
117
Signs
5
19
Curtains and
draperies
16
111
Retail bakeries
4
7
LO1
11-5
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
11-6
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
11-7
• 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
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 – highly elastic
• 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
11-8
Copyright 2008 The McGraw-Hill Companies
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
11-9
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
11-10
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
11-11
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
11-12
Copyright 2008 The McGraw-Hill Companies
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
11-13
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
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
Key Terms
End Show
Market Structure Continuum
11-14
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
11-15
Copyright 2008 The McGraw-Hill Companies
Oligopolistic Industries
• Four-firm concentration ratio
• 40% or more to be oligopoly
• Shortcomings
• Localized markets
• Inter-industry competition
• World price
• Dominant firms
LO3
11-16
High Concentration Industries
(1)
Industry
Primary copper
(2)
4-Firm
Concentration
Ratio
(3)
Herfindahl
Index
99
ND
(1)
Industry
(2)
4-Firm
Concentration
Ratio
(3)
Herfindahl
Index
Petrochemicals
85
2662
83
1901
Cane sugar refining
99
ND
Small arms
ammunition
Cigarettes
95
ND
Motor vehicles
81
2321
80
2515
Household laundry
equipment
93
ND
Men’s slacks and
jeans
Beer
91
ND
Aircraft
81
ND
Electric light bulbs
89
2582
Breakfast cereals
78
2521
78
2096
Glass containers
88
2582
Household vacuum
cleaners
Turbines and
generators
88
ND
Phosphate fertilizers
78
1853
Tires
77
1807
Electronic
computers
76
Alcohol distilleries
71
Household
refrigerators and
freezers
85
1986
Primary aluminum
85
ND
LO1
2662
1609
11-17
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
11-18
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
11-19
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
11-20
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
11-21
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
11-22
• 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
11-23
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
11-24
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
11-25
• 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
11-26
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
11-27
Copyright 2008 The McGraw-Hill Companies
The OPEC Cartel
Daily oil production (barrels) , November 2008
Saudi Arabia
Iran
Kuwait
Venezuela
Iraq
Nigeria
UAE
Angola
Libya
Algeria
Qatar
Indonesia
Ecuador
8,904,000
3,843,000
2,538,000
2,368,000
2,297,000
2,183,000
2,117,000
1,804,000
1,737,000
1,417,000
848,000
843,000
530,000
Source: A. T. Kearney, Foreign Policy
11-28
Global Perspective
LO6
11-29
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
11-30
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
11-31
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
11-32
• 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
• Prevalent to compete with product
development and advertising
• Less easily duplicated than a price
change
• Financially able to advertise
LO7
11-33
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
11-34
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, lower
priced, unadvertised version of the
product.
11-35
Oligopoly and Advertising
The Largest U.S. Advertisers, 2008
Company
Advertising Spending
Millions of $
Procter & Gamble
$4831 ($4.8 Billion !)
Verizon
$3700
AT&T
$3073
General Motors
$2901
Johnson & Johnson
$2529
Unilever
$2423
Walt Disney
$2218
Time Warner
$2208
General Electric
$2019
Sears
$1865
Source: Advertising Age http://www.adage.com
LO7
11-36
Global Perspective
LO7
11-37
Oligopoly and Efficiency
• Oligopolies are inefficient
• Productively inefficient P > minATC
• Allocatively inefficient P > MC
• Qualifications
• Increased foreign competition
• Limit pricing
• Technological advance
LO7
11-38
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
11-39
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
11-40
• 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