Monopolistic Competition and Oligopoly (Chapter 12)

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لحعجصمح() عا با ‎Vopios‏ ® Dpupoistic Covwpetiicc ۶ ‏بایان‎ ‎® Prive Cowpertiioa a Covwwpetiicva Orrsus Oulusiod: ke ‏سس‎ Diewowa 0۳۷ IE Oke S 

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لحعجصمح() عا با ‎Vopios‏ ‎Por‏ مرمم‌سازا) تس( با ‎ooplicativas oP‏ "1 Oliqopotistic Privicrey ® Cartels ۱ 0۳۷ IE Oke SD 

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QOvwpolstic Oop tii 8 Dke awoud oP wouwpoly power depesds vo © Exawples oP this very ‏اوه موم‎ structure foctude: ‏ما و‎ ‏ه‎ Sow © Col rewedies 0۳۷ IE Oke S 

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© ‏مان‎ ‎© Crest und woupoly power * Provier & Guwble is the sole produver of Orest * Cocsuvers oon have o prePereare Por Orest--- fuse, repuliog, decoy prevecitoy ePPicay The yreuer the prePereuve (dPPereututiod) the Oke Oo 

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QOvwpolstic Oop tii ® Quesivd © Doves Provier & Gawble have work woupoly power to the worket Por Orest? 0۳۷ IE 6 

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QOvwpolstic Oop tii ® Dke Ochi oP Ovupolstic Cowpetiica © D0 ispportodt ‏اه و‎ * OP Percoticted but hight) substitutable products * Pree eutry und exit 0۳۷ IE Oke O 

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Cire ta he Ghort ord boo Qua 

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Cire ta he Ghort ord boog Qua © Observations (skort) ® Oowawerd stopiag ‏هط الم مرو‎ product © )]( ‏لجووج‎ is relatively clostio--ypod substitutes ٠» 06 > ‏م‎ © Orth ore wontwized whea DR = OC ‏و‎ Pirsn is wohioy epvorwir proPite 

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Cire ta he Ghort ord boog Qua © Pri wil attract ‏ری‎ Pires to the iodusiry = (a banters to eur) © Phe old Biren’ dew wil derreuse to O, © Pinn’s vulput ced price wilt Poll 0 dadusiry vuiput will rise ® Ov exowwir profit (P = @C) © P> OC -- sowe woowpoly power LR 0۳۷ IE Olde 0 

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00 0 De ‏همه‎ 

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QOvwpolstic Oop tii a Oveupvlistic Cov petition and Covarwir GPR iviewy © Phe woupoly power (diPPereuttatiza) yields a higher price thud perPent cowpetiica. IP price ues lowered to the pot where . 020 < O, trict. 

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QOvwpolstic Oop tii ® Dowpolstic Covwpetiiva ond ‏جامحكمومع7)‎ ‎GPR iviewy © Oth Ww exo wwwir proPits ta the roy ro, the Pix is ofl ont produciag ‏نی له‎ (BC urd excess ۲2۱۳۲۵۲ exists. 

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QOvwpolstic Oop tii © Qvesiivas qd) 4B the woarket bevawe vowpetiive, what would hoppes to ‏ال انح‎ ued price? ©( Chak! wouwpoloty vowpetiiva be 

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QOvwpolstic Oop tii © Qvesiivas power? ee 

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Qvwpolsic Coxnpertiicc ta the Dorket Por Ovkes ‏عع و2 لجه‎ © Phe workets Por soPt ‏اس امن و‎ ihustrate the chucanteristivs oP ‏موی‎ ‎vow prtiiod. ع0 عبت ‎IE‏ 0۳۷ 

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Chosticties oP Desvacd Por Q@rands vP Ovkes und OvPPee rand Cheticty oF Orwaad Colas? Roya Crows 0 ‏م6‎ Coke 0.6 9 - Brod OpPPee: Tile Orotkers ‏0مك‎ ‏با اعنوی()‎ 0.9 Cher un Guboaw -9.0 0۳۷ IE ۵۷» 0 

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Chosticties oP Desvacd Por rans oP Ovkes und OoPPer ® Questo 0) Obv is the decor Por (Ropal Crow wore price taetstic tho Por Ooke? 9( 45 there wuvk wouwpoly power in these tw warkets? 0۳۷ IE Oke 1S 

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اسان © ‏جساك و0‎ © Gaol cucber oP Pireos © Product dPPereuivion way vr way ut exist © Oars ty ‏رس‎ 0۳۷ IE Obde SD 

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اسان ® Cxanples ‏امن و‎ ‏و‎ Steet ‏تیا‎ ‎© Petrockewirds © Clevtricd equipwest © Cowputers 0۳۷ IE Oke Od 

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اسان ‎bamers to eutry ure:‏ ۱۱ ا" ‎Oaturd‏ © ‎Code evowwier‏ * ‎Pateuts‏ * رای شاو صصص رجه (]) © ‎0۳۷ IE 60-66 ‎ 

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اسان ‎bamers to eutry ure:‏ ۱۱ ا" مت مب رن ه ‎the warket‏ )۰ ‎put‏ ادنویه مه مزاول + ‏وه ی ‎IE‏ 0۳۷ ‎ 

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اسان ® Qonnewed Cholewpes © ‏منت زیم ون‎ ‏مها مرن و‎ ® Questiva © )( ‏دا‎ oe the possible rud respouses iu ID% price vat by Cord? 0۳۷ IE Obde OF 

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اسان ‎Olpolistic Darket‏ مه ون ممتماانی() ظ ‏فصو لاصو رت تا باه ‎did ant have to poosider‏ ط مر لا روصت له نون ره مار مت اه ‎price.‏ ‎© Aa oligopoly the producers ‏له اس‎ the respouse oF ‏ان روت یی موی‎ ‎0۳۷ IE Obte OS ‎ 

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اسان ‎Olpolistic Darket‏ مه ون ممتماانی() ظ مسا( رشن ۰ يد مد له ی را پم سا رم )۰ ‎iuveuive to chooge their vulput or price‏ ‎(OH Pins aussie posers one tobi rival‏ * ‎0۳۷ IE ‏ی‎ ‎ 

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اسان ® Dusk ‏ممنواانن؟)‎ ‎© Gack Bins is dot the best t ooo qed what its 0۳۷ IE Oke OP 

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اسان © Phe Courcnt Oodel © Owpoly * Pwo Firs ‏ری‎ wit ‏اه ای‎ ‏لس مرا‎ ‎the viker Pirw is ussucved to be‏ اه نون با 35 ‎0۳۷ IE Oke CO ‎ 

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٩۳ ‏مب‎ ) fade Prax © ud ‎woke, to decd‏ لیر ‎rare, 0,0), be worker ‏وی الط‎ ‎AP Pre 1 take Pro © ud poker 0 cto, ty deere neve ehPed ty fer Pt by fe ort, ‎ ‎ ‎ ‎AP Ore ticke Pre 8 ul prodow PO ‏عا يحي ججح جا رطفن‎ ‏اسه عدا رطا بتاعا صحلا حا تیار‎ ‎ ‎ ‎Ss ‎*@(GO) ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎0,۳9( ‎MRCS) ‎ ‏وه ی ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ 

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اسان عرصد() مشمج؟) ب۱/ 8 © 0 Pinn’s proPi-wosteiziey ‏و ها ال‎ schedule oP the expevied vutput oP Pin ۰ 0۳۷ IE ۵» 0 

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Qeutod Curves ut Courat Gquilbrius Pre U's rewws pave shows how wok ‏ای اجه مخ هه سل من‎ thie Piro © ul poker. The x's لسلست جص جا جا ببس Pre O's rewtrs vue shows how wok ul prokow ‏بصا نه ممصي" د جد‎ ck thecke Pro dud prokew. ‎Cro O's Pree‏ کم ‎Onn BOQ.) ‎ ‎ ‎410 Onwrent eqs, rook 9 ‏سم یمیت پات سا‎ 2 ‏ا‎ ‎Ye prokor oe ‏باحصا‎ ‎swat tr ours prot. ‎ ‎ ‏سوه ۲۶ مسق ‎One QQ)‏ ‎es 90 28 100 9 ‎ ‎ ‎ ‎ ‎ ‎ ‎ 

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اسان ® Qvuestivw d) WR the Pires ore ont producicy of the Court equilbrucv, will they odust etl he Courant equilibrive is reached? ©) Okeu is it roticcd to ussucve that its powpetior’s vulput is Pred? 0۳۷ IE Obte SE 

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اسان ‎fel eens‏ ® Qa Cxaple oP the Courcnt Cquitbriuc ‏اناب‎ * Dorket dewerd is P =9O - Quwhere Q= ©, + © © > ي©0 دبن0 ‎٠‏ 0۳۷ IE ‏ی‎ 9 

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اسان Phe Lica Dewar Owe 2Qu Exanvple oF the Courant quitbrivea ® Finn (es Reaivd Curve TotalRevenug, =PQ =(30- DQ =30Q - (Q+Q)Q \ =309- 6 - 0 0۳۷ IE Obde OE 

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Olkppoly The biceow Oeward Curve " Ba Cxanple of the Courant Cquilbrive MR=AR/AQ =30- 2Q- Q MR=0=MG Picts Rewivd Ourve Q=15- 1/2 Pieves Reuiivr Ourve | Q =15- 0 ی 6 

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اسان Phe Lica Dewar Owe ٩ ‏د‎ Exanvple oF the Courant quitbrive Couwet Cquilibriu wiQ =. 15- /2(15- 1/20( -0 Q=Q+Q =20 \ P=30- Q=10 0۳۷ IE ‏ی‎ SO 

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اسان ‎Coksica‏ انب مش‌تنممی() بظ) ‎ ‎ ‎R=PQ=(30- QQ=300- MR=ARAQ=30- 2Q ١ MR=0 whe =15andM@R= MC ‎0۳۷ IE Ore 0 ‎ ‎ ‎ 

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اسان ‎Coksica‏ انب مش‌تنممی() بظ) ‎ ‎ ‏مصد) ول ا" © دين + رو ‎٠‏ ‎und GQ, that‏ 6 نی ‎oP‏ عم اه رات ‎wuaxtwizes total proPits‏ 5.6 - و9 0,2 ‎٠‏ ‎*Less ‏كمه انجادي‎ higher proPits toa the Couret ‏انوس‎ ‎0۳۷ IE ‏ی‎ 9 ‎ ‎ ‎ 

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(Por te Pew, vehi ‏ها‎ he best ‏وف‎ Polawed by te Oowrcnt Oxndbrice cad tes ter ‏شدای تست متا‎ (0 < ۳۸ :00 < 0) شوت موی 

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rst Dover @dvaatacge-- The Gtockebery Oodet ® @ssnvpiow © Ove Pie om set vulput Pirst » ‏0ن‎ - © Oorket dewudd is P = OO - Q where Q = tod ‏ا‎ ‎© Pir ( sets vutput Pirst od Pir © theo wokes wo putput devisioa 0۳۷ IE 9 0 

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rst Dover @dvaatacge-- The Gtockebery Oodet " inv | © Oust ooesider the neurtiva oP Pir © " ‏و مر‎ © ‏جدوان”]/‎ Pir C's vulput os Pixed oad therePore ‎with the Courent neurtiva pure?‏ لجان وال ,0 - 9 < رب( ‎0۳۷ IE ‏لب‎ ‎ 

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rst Dover @dvaatacge-- The Gtockebery Oodet iw ( © Chovsr GQ, sv that! MR= MC, MC= Oterefore OR =O R = PQ =30-@ - QQ 0۳۷ IE Obde PS 

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rst Dover @dvaatacge-- The Gtockebery Oodet ® Gubstitutioc Pir 9 Reutva Curve Por 6 1 2300 - 0 - 005 1/20( -150 - 0 MR=AR/AQ =15 ۵ \ MR=0:Q =15andQ, =7.5 0۳۷ IE Obde OF 

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rst Dover @dvaatacge-- The Gtockebery Oodet ® Cowhsiva ‏و‎ Pie C's vuputis twice us large us Pir O’s ‏ه‎ Bir (C's prob itis twice us boxe us Pir O's ® Qvesiives © OW is tt wore proPituble to be the Pirst wover? © Dkick wodel (Courant or Ghachebery) is wore appropriate? 0۳۷ IE Obde PS 

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rive Ovvwwprtiica ® Oowpetiivs ia co vliqopoltstic tohustqy way poor wits price tustead bP output. # Dke ‏نو‎ Oodel is used to thustrote price Dow peice ioc cliqopolistic iocustqy vit 0۳۷ IE Obde 0 

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Prive Ovvoprtiica Q®ertrand Oodet a Ossucvptiows ® Wowo yews youd © Dorket decwurrd is PP = OO - Q where 9 < 6, 0 ۰ 0 - 59 ۲ bok Pins urd ODO, = OC, = $9 0۳۷ IE Ore PP 

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Prive Ovvoprtiica Q®ertrand Oodet a Ossucvptiows © Phe Courant equilbriuc: * P=$12 at Porbotk ۰۶ 2۲ ‎the Pinvs powwpete wi price, ut‏ ین و ‎quactiiy.‏ ‎0۳۷ IE Ore FO ‎ ‎ ‎ 

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rive Ovvwwprtiica Q®ertrand Oodet Bow wil pooanvers respowd ۳ ۰ prive ۱ (Wirt: Cousider kowoyeurity) © Dke Dusk equilbriuc: *P =O; P, = Pz = $9 6.6 - ي9 4 رو :+6 - و * ‎«٠‏ a =0 0۳۷ IE Obde 9 

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rive Ovvwwprtiica Q®ertrand Oodet © Okp wt chore ‏ه‎ higher prive to reise prvPits? © Wow des the Oerted vutoowe pospure to the Cours ‏سان‎ ® Dke @ertrocnd wodel dewvustrates the ismportoave of the stroteqic vartuble (price versus vuiput). 0۳۷ IE Obte 0 

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rive Ovvwwprtiica Q®ertrand Oodet © Cricisws © Oke Firs produce u kowoyeuus ypod, itis wore wotucd to powwpete by setiogy ‏اه شم‎ thoc prices. ® ved P the Pires do set prives od choose the save price, wha share oP total soles wil yo to puck poe? + ‏رو‎ wot be egually divided. 0۳۷ IE Oke 0 

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rive Ovvwwprtiica = Prive Covwppetiticc wits DiRPereutcted Products © Market shores are ww detercviced ut just by prives, but by dPRereuves in the desicn, perforweue, ocd durabiliy oP eack Pirn’s proche. 0۳۷ IE Obte SO 

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Obte SO Prive Ovvoprtiica OF Pereutated Products a Ossucvptiow ‏رای( و‎ ٠ ‏نع‎ - 00 ٠» ‏0د نن‎ 

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rive Ovvwwprtiica OF Pereutated Products a Ossucvptiows ® Pir ('s dewerd is Qy= dC - OP, + Py ® Pin O's dew ts GQ, = IC - CP, + Py * Py add Oy we prives Pires (ocd © charge * 0 aed Qs we the resutliog quantities they sel 0۳۷ IE Obde SE 

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Prive Ovvoprtiica ‎Products‏ اه سس تین ‎ ‎a Ortercvicticry rives urd Output ‎© Get prives at the sae toe Firn:2, =PQ- $20 =P(12- 2P+ B)- 20 \ =12P-2P + PP - 20 ‎0۳۷ IE Obte SS ‎ ‎ ‎ 

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Prive Ovvoprtiica ‎Products‏ اه سس تین ‎ ‎© ODetercoiiegy Pripes ood Output © Fire (1: WP Pais Pred: ‎Pirct!'s prot woxiviziy «price = Am,/AR =12- 4B + B =0 ‎cove =‏ شم و 1/4 +3< 7 ‎curve =‏ شم 9 +23 و7 ‎0۳۷ IE Obte SO ‎ ‎ ‎ 

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Ousk Gaudibriuc ta Prives ® ves the Gtackebery wodel prediciog Por First wover hold whe prive is the variuble fostecnd ‏بحسب خام‎ © ‏كانيج (]) :وراك‎ pou wont to set price Pirst? 0۳۷ IE Ore SO 

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® Privicy Prvblew Por Prover & Guwble OF Pereutated Products ® Goecuniv 4) Provier & Bucble, 90 Soup, ‏.كايا‎ ‎ood Ovitever, Ltd were ‏لكك اكع‎ the waurket Por Gypsy Ook Tupe. 9( Ot three LWwould be chovsicry thei- priives ut the sae fie. 0۳۷ IE Obte SO 

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® Privicy Prvblew Por Prover & Guwble OF Pereutated Products ® Goeuw 3) © @rover & Cable hreditc powsider powpetitors prices whens @) PC = $PFOO, OOO hove ord 9 2 bar ck rere 0۳۷ IE ۵» 0 

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® Privicy Prvblew Por Prover & Guwble OF Pereutated Products | ‏وجح ره‎ S) P&O's dewerd curve wus! Q=8,07°SP99(P,)°(P,)° *Okere P, Py, Py we P&O’s, Duilever’s, respevively oO? wd (Kan’s prives 0۳۷ IE Oke Od 

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® Privicy Prvblew Por Prover & Guwble OF Pereutated Products © Probew © Oba prive should P&C choose ood what is the pxpevied probit? 0۳۷ IE 605-68 

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۳۵۳ ‏سر و چاه سا م) انس‎ wook) 80's ‏حصت (سو) ناسون‎ ($) Prox ($)1.1D 1.60 4.80 AFD 4.980 4.90 470 460 d.dO -GE9-C16-COFASF 4069-0206418 GS 490 4109۵979 -GO-FO-CO 48-2 0.500 842-489 (sod ۵8 400۵ ۵0 206 906006 0 66 0.60 ۰2846-089 8 0.60 8۵0۵-۵040040 «de GORE 44۶0۵ 970409 ۵0 0 06 460 46410946 9 200-4۶ 

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® Privicy Prvblew Por @rovter & Gawble ® Oka Oo You Thick? ‎Ov wold euck Pir choose 9‏ الك ‎Witt Phick Dusk‏ 50.0007 خام ‎prive‏ ‎Cquilbriuc‏ ‎©) Oka is the proPit worteizien price ‎0۳۷ IE Obde OF ‎ 

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Covnpetiicad Orrsus Ovhusiod! The Prisveers’ Olea ® Ohy woulde't cack Pircn set the polusiva 0۳۷ IE ‏لب‎ OS 

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Covwppr tion Orrsus Ovlusion: The Prisveers’ Olea # Ossuve: FC=$20andVC=$0 Firni sdemandQ=12- 2P+B Firn?'sdemandQ=12- 2B +P NaslEquilibrm: P=$4 za =$12 \ Collusion P=$6 a =$16 0۳۷ IE Obte SO 

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مت و 9) میا( ‎Dre @risvvers’‏ ® Possible Privicny Outros? Firm: P=$6 Firn2:P=$6 2 =$1€ P=$6 P=$4 ‏ر7‎ 270۵, - 0 =(4)|12- (2)(4) +6 - 20=$20 m, =RQ- 20 | -)6(12- )2()6( + 4! - 20-44 0۳۷ IE Oke OP 

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_ayehh Dern Por Pret aoe 960, 909, 0 Oke OO $ae, $ae 96, 0 Prod ۱ , ‏و0‎ Ohare $F 6 

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Covnpetiicad Orrsus Ovhusiod! The Prisveers’ Olea روم ‎Dhese tio Pinos ore‏ ® ۶۰ ۲۳7۳۳۳۳۷۲۲ له مه از بو عا ول رال ما ون و ‎Qvestiod‏ # © Ohv will bok Pircos botk choose $F wheo $9) will Vie! higher proPits? 0۳۷ IE Obte OS 

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Covnpetiicad Orrsus Ovhusiod! The Prisveers’ Olea © Qo menople in yowe ‏لت رس‎ the Prisviers’ Dilewowva, thustraes the problew vitwpvlistic Pins Pave. 0۳۷ IE Ode TO 

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Covnpetiicad Orrsus Ovhusiod! The Prisveers’ Olea ® Gceu © Dw prisvvers kuve bee aased vP ‏و راهان‎ ۵ © Phep we in seporde jul vels cod pact DOW ie. ‎kus bers usked ty podP ess to the ori.‏ ون و ‎0۳۷ IE Obde TO ‎ 

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Oke TO ‎Qutrtx Por Prisocers’ Dilewua‏ مرو ‏ما ] و0۳ ‎6,8 4-0 ‎ ‎ ‎QOnud pou clover to wo ‏ووو‎ ‎000, 0 2,2 ‎ ‎ ‏سس ‎9 ‎ ‎ ‎ ‎ ‎ ‎ ‎ 

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@upoPP Dutrix Por te P & C Preveers’ Oiewwa ® Ovwhsiows: Oltipotistic Darkets 0) )0 ‏صوحصی صا لعدصا الأببا حصاص ]ام‎ proPits ©( ‏امه امن لحم تاو‎ is possible wotive to boewk aed lower prive is ‏احص مواد‎ 0۳۷ IE Oe TS 

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‎P Outrix Por the P&B Prictay Problew‏ روص ‎ ‎Otte TH ‏ج00 لب صطله ‎0! 0 ‎809, 0 ‎ ‎560, 0 ‎Oke price shoud P & 6 ‏وه‎ ‎ ‎Ohare $1.FO ‎506, © ‎ ‎59, 40 ‎ ‏ص0 ‏900 ‎P&B ‏سوه ‏$4.60 ‎ ‎ ‎ ‎ ‎ ‎ ‎ 

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‘keoplicativas oP tke Prisvuers’ QOtexwxvd Por Olkipotsic Prictacy ® Obsenatiivds oP Olqopoly Bekavior 0) ۱ bekavior ia tie oo ‏و‎ ٩ predictable privacy ‏امجدج ونوج‎ 0۳۷ IE Oe 7S 

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‘keoplicativas oP tke Prisvuers’ QOtexwxvd Por Olkipotsic Prictacy ® Observativds ve Oligopoly Dekuior ©) 4a vier viqopoly wurkets, the Pireos we very apressive ud oolusiod is * Pins oe retuctodt to chooge price berouse ao this ‏وی‎ prices tec to be relatively rigid. 0۳۷ IE Ore TO 

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‘keoplicativas oP tke Prisvuers’ Otexrowa Por Oltyopotistic Prictacgy rice Gigerakcry & Price bewershiz ‎Prive Signaler;‏ ا" ‎Aeoplicit oohusion io Wwhick o Pir comes a‏ © ‎Prive iamreuse ia the hope that cher Pires will‏ ‎Pollouy Swit‏ ‎0۳۷ IE Oke TS ‎ ‎ ‎ 

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‘keoplicativas oP tke Prisvuers’ Otexrowa Por Oltyopotistic Prictacgy rice Gigerakcry & Price bewershiz ® rive Leaership ‏ود رت اه مس و‎ Wwhick var Pir ‏اوه‎ ‏اه‎ 0۳۷ IE Ore OO 

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‘keoplicativas oP tke Prisvuers’ QOtewevd Por Olkppokstic Prictary © Phe Oowieodt Pino Ovdel © a sow. vliqopolstic warkets, vor barge Pir kos wor skare oP total soles, ord a yup oF worker. © The barge Pircy wiqht theo ant us the d>wicrcat Airw, setiog a price thot woaxicvized its pu proPits. 0۳۷ IE 9۷» 0 

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Price Getrag by a Opeviccat Pir امد وس ‎Whe door‏ ما سمل بت مس تایح سل (0) سس سامت .(و©) عرسا سحب دا م م20 Ottis prve, Prine ‏ونا‎ ‎ol, wo te wed ‏و سح‎ 2 دی و2 

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Ourtes © Chorwteriioe Q) Oost oPted intercativcal ان ‎oO eee‏ م02 * ۰*۳0 ‎Ds‏ عمه8) أدمستدمص ]|/ * Ossvvicioa * ‏خرن‎ ‎* ‏سح‎ Curcpev Dea * Comma 0۳۷ IE Oe OF 

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Ourtes © Choructeristios 02 Coxnliicas Por success * Oowpetiive dhercdive suPPiciethy deters cheuticry * Poteatal oP weopoly power-taelostic deworrd 0۳۷ IE Ore OS 

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Ourtes ® Cowparicey OPEC tp 0 ‎Oost cotels iewolve u portiog oP the warket whick‏ ه ‎0۳۷ IE Ore OO ‎ 

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Chapter 12 Monopolistic Competition and Oligopoly Topics to be Discussed  Monopolistic Competition  Oligopoly  Price Competition  Competition Versus Collusion: The Prisoners’ Dilemma Chapter 12 Slide 2 Topics to be Discussed  Implications of the Prisoners’ Dilemma for Oligopolistic Pricing  Cartels Chapter 12 Slide 3 Monopolistic Competition  Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product Chapter 12 Slide 4 Monopolistic Competition  The amount of monopoly power depends on the degree of differentiation.  Examples of this very common market structure include:  Toothpaste  Soap  Cold Chapter 12 remedies Slide 5 Monopolistic Competition  Toothpaste  Chapter 12 Crest and monopoly power  Procter & Gamble is the sole producer of Crest  Consumers can have a preference for Crest---taste, reputation, decay preventing efficacy  The greater the preference (differentiation) the higher the price. Slide 6 Monopolistic Competition  Question  Does Procter & Gamble have much monopoly power in the market for Crest? Chapter 12 Slide 7 Monopolistic Competition  The Makings of Monopolistic Competition Two Chapter 12 important characteristics  Differentiated but highly substitutable products  Free entry and exit Slide 8 A Monopolistically Competitive Firm in the Short and Long Run $/Q Short Run $/Q MC Long Run MC AC AC PSR PLR DSR DLR MRSR QSR Quantity MRLR QLR Quantity A Monopolistically Competitive Firm in the Short and Long Run  Observations (short-run)  Downward sloping demand--differentiated product  Demand  MR <P  Profits  This Chapter 12 is relatively elastic--good substitutes are maximized when MR = MC firm is making economic profits Slide 10 A Monopolistically Competitive Firm in the Short and Long Run  Observations (long-run)  Profits will attract new firms to the industry (no barriers to entry)  The old firm’s demand will decrease to DLR  Firm’s output and price will fall  Industry output will rise  No economic profit (P = AC)  P > MC -- some monopoly power Chapter 12 Slide 11 Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium Monopolistic Competition Perfect Competition $/Q $/Q MC Deadweight loss AC MC AC P PC D = MR DLR MRLR QC Quantity QMC Quantity Monopolistic Competition  Monopolistic Competition and Economic Efficiency  The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle. Chapter 12 Slide 13 Monopolistic Competition  Monopolistic Competition and Economic Efficiency  With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. Chapter 12 Slide 14 Monopolistic Competition  Questions 1) If the market became competitive, what would happen to output and price? 2) Should monopolistic competition be regulated? Chapter 12 Slide 15 Monopolistic Competition  Questions 3) What is the degree of monopoly power? 4) What is the benefit of product diversity? Chapter 12 Slide 16 Monopolistic Competition in the Market for Colas and Coffee  The markets for soft drinks and coffee illustrate the characteristics of monopolistic competition. Chapter 12 Slide 17 Elasticities of Demand for Brands of Colas and Coffee Brand Colas: -5.7 Ground Coffee: Chapter 12 Elasticity of Demand Royal Crown Coke -2.4 -5.2 to Hills Brothers Maxwell House Chase and Sanborn -7.1 -8.9 -5.6 Slide 18 Elasticities of Demand for Brands of Colas and Coffee  Questions 1) Why is the demand for Royal Crown more price inelastic than for Coke? 2) Is there much monopoly power in these two markets? 3) Define the relationship between elasticity and monopoly power. Chapter 12 Slide 19 Oligopoly  Characteristics  Small number of firms  Product differentiation may or may not exist  Barriers Chapter 12 to entry Slide 20 Oligopoly  Examples  Automobiles  Steel  Aluminum  Petrochemicals  Electrical equipment  Computers Chapter 12 Slide 21 Oligopoly  The barriers to entry are:  Natural Chapter 12  Scale economies  Patents  Technology  Name recognition Slide 22 Oligopoly  The barriers to entry are:  Strategic Chapter 12 action  Flooding the market  Controlling an essential input Slide 23 Oligopoly  Management Challenges  Strategic  Rival  actions behavior Question  What are the possible rival responses to a 10% price cut by Ford? Chapter 12 Slide 24 Oligopoly  Equilibrium in an Oligopolistic Market  In perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rival’s response when choosing output and price.  In oligopoly the producers must consider the response of competitors when choosing output and price. Chapter 12 Slide 25 Oligopoly  Equilibrium in an Oligopolistic Market  Defining Chapter 12 Equilibrium  Firms doing the best they can and have no incentive to change their output or price  All firms assume competitors are taking rival decisions into account. Slide 26 Oligopoly  Nash Equilibrium  Each firm is doing the best it can given what its competitors are doing. Chapter 12 Slide 27 Oligopoly  The Cournot Model  Duopoly Chapter 12  Two firms competing with each other  Homogenous good  The output of the other firm is assumed to be fixed Slide 28 Firm 1’s Output Decision If Firm 1 thinks Firm 2 will produce nothing, its demand curve, D1(0), is the market demand curve. P1 D1(0) If Firm 1 thinks Firm 2 will produce 50 units, its demand curve is shifted to the left by this amount. MR1(0) D1(75) If Firm 1 thinks Firm 2 will produce 75 units, its demand curve is shifted to the left by this amount. MR1(75) MC1 MR1(50) 12.5 25 Chapter 12 D1(50) 50 What is the output of Firm 1 if Firm 2 produces 100 units? Q1 Slide 29 Oligopoly  The Reaction Curve A firm’s profit-maximizing output is a decreasing schedule of the expected output of Firm 2. Chapter 12 Slide 30 Reaction Curves and Cournot Equilibrium Q1 100 Firm 1’s reaction curve shows how much it will produce as a function of how much it thinks Firm 2 will produce. The x’s correspond to the previous model. Firm 2’s reaction curve shows how much it will produce as a function of how much it thinks Firm 1 will produce. 75 Firm 2’s Reaction Curve Q*2(Q2) 50x 25 Cournot Equilibrium Firm 1’s Reaction Curve Q*1(Q2) 25 Chapter 12 In Cournot equilibrium, each firm correctly assumes how much its competitors will produce and thereby maximize its own profits. x 50 x 75 x 100 Q2 Slide 31 Oligopoly  Questions 1) If the firms are not producing at the Cournot equilibrium, will they adjust until the Cournot equilibrium is reached? 2) When is it rational to assume that its competitor’s output is fixed? Chapter 12 Slide 32 Oligopoly The The Linear Linear Demand Demand Curve Curve  An Example of the Cournot Equilibrium  Duopoly  Market demand is P = 30 - Q where Q = Q1 + Q2  Chapter 12 MC1 = MC2 = 0 Slide 33 Oligopoly The The Linear Linear Demand Demand Curve Curve  An Example of the Cournot Equilibrium  Firm 1’s Reaction Curve TotalRevenue, R1  PQ1 (30 Q)Q1 30Q1  (Q1  Q2 )Q1 30Q1  Q12  Q2Q1 Chapter 12 Slide 34 Oligopoly The The Linear Linear Demand Demand Curve Curve  An Example of the Cournot Equilibrium MR1 R1 Q1 30 2Q1  Q2 MR1 0 MC1 Firm1' s Reaction Curve Q1 15 1 2Q2 Firm 2's Reaction Curve Q2 15 1 2Q1 Chapter 12 Slide 35 Oligopoly The The Linear Linear Demand Demand Curve Curve  An Example of the Cournot Equilibrium Cournot Equilibriu m : Q1 Q2 15 1 2(15 1 2Q1) 10 Q Q1  Q2 20 P 30 Q 10 Chapter 12 Slide 36 Duopoly Example Q1 30 Firm 2’s Reaction Curve The demand curve is P = 30 - Q and both firms have 0 marginal cost. Cournot Equilibrium 15 10 Firm 1’s Reaction Curve 10 Chapter 12 15 30 Q2 Slide 37 Oligopoly Profit Profit Maximization Maximization with with Collusion Collusion 2 R PQ (30 Q)Q 30Q  Q MRR Q 30 2Q MR0 whenQ 15andMRMC Chapter 12 Slide 38 Oligopoly Profit Profit Maximization Maximization with with Collusion Collusion  Contract Curve  Q1  + Q2 = 15 Shows all pairs of output Q1 and Q2 that maximizes total profits  Q1 =  Chapter 12 Q2 = 7.5 Less output and higher profits than the Cournot equilibrium Slide 39 Duopoly Example Q1 30 Firm 2’s Reaction Curve For the firm, collusion is the best outcome followed by the Cournot Equilibrium and then the competitive equilibrium Competitive Equilibrium (P = MC; Profit = 0) 15 Cournot Equilibrium Collusive Equilibrium 10 7.5 Collusion Curve Chapter 12 Firm 1’s Reaction Curve 7.5 10 15 30 Q2 Slide 40 First Mover Advantage-The Stackelberg Model  Assumptions  One firm can set output first  MC =0  Market demand is P = 30 - Q where Q = total output  Firm 1 sets output first and Firm 2 then makes an output decision Chapter 12 Slide 41 First Mover Advantage-The Stackelberg Model  Firm 1  Must  consider the reaction of Firm 2 Firm 2  Takes Firm 1’s output as fixed and therefore determines output with the Cournot reaction curve: Q2 = 15 - 1/2Q1 Chapter 12 Slide 42 First Mover Advantage-The Stackelberg Model  Firm 1 Choose Q1 so that: MR  MC, MC 0 therefore MR 0 R1  PQ1  30Q1 - Q12 - Q2Q1 Chapter 12 Slide 43 First Mover Advantage-The Stackelberg Model  Substituting Firm 2’s Reaction Curve for Q2: R1 30Q1  Q12  Q1(15 1 2Q1) 15Q1  1 2Q12 MR1 R1 Q1 15 Q1 MR0: Q1 15 andQ2 7.5 Chapter 12 Slide 44 First Mover Advantage-The Stackelberg Model   Conclusion  Firm 1’s output is twice as large as firm 2’s  Firm 1’s profit is twice as large as firm 2’s Questions  Why is it more profitable to be the first mover?  Which model (Cournot or Shackelberg) is more appropriate? Chapter 12 Slide 45 Price Competition  Competition in an oligopolistic industry may occur with price instead of output.  The Bertrand Model is used to illustrate price competition in an oligopolistic industry with homogenous goods. Chapter 12 Slide 46 Price Competition Bertrand Bertrand Model Model  Assumptions  Homogenous good  Market demand is P = 30 - Q where Q = Q1 + Q2  MC $3 Chapter 12 = $3 for both firms and MC1 = MC2 = Slide 47 Price Competition Bertrand Bertrand Model Model  Assumptions  The  Cournot equilibrium: P $12  for both firms $81  Assume quantity. Chapter 12 the firms compete with price, not Slide 48 Price Competition Bertrand Bertrand Model Model  How will consumers respond to a price differential? (Hint: Consider homogeneity) The Nash equilibrium: P = MC; P1 = P2 = $3  Q = 27; Q1 & Q2 = 13.5   Chapter 12  0 Slide 49 Price Competition Bertrand Bertrand Model Model  Why not charge a higher price to raise  How does the Bertrand outcome compare to the Cournot outcome?  The Bertrand model demonstrates the importance of the strategic variable (price versus output). Chapter 12 profits? Slide 50 Price Competition Bertrand Bertrand Model Model  Criticisms  When firms produce a homogenous good, it is more natural to compete by setting quantities rather than prices.  Even if the firms do set prices and choose the same price, what share of total sales will go to each one?  It may not be equally divided. Chapter 12 Slide 51 Price Competition  Price Competition with Differentiated Products  Market shares are now determined not just by prices, but by differences in the design, performance, and durability of each firm’s product. Chapter 12 Slide 52 Price Competition Differentiated Differentiated Products Products  Assumptions  Duopoly  FC = $20  VC =0 Chapter 12 Slide 53 Price Competition Differentiated Differentiated Products Products  Assumptions  Firm 1’s demand is Q1 = 12 - 2P1 + P2  Firm 2’s demand is Q2 = 12 - 2P1 + P1 Chapter 12  P1 and P2 are prices firms 1 and 2 charge respectively  Q1 and Q2 are the resulting quantities they sell Slide 54 Price Competition Differentiated Differentiated Products Products  Determining Prices and Output  Set prices at the same time Firm1: 1 P1Q1  $20 P1(12 2P1  P2 )  20 2 1 12P1 - 2P  P1P2  20 Chapter 12 Slide 55 Price Competition Differentiated Differentiated Products Products  Determining Prices and Output  Firm 1: If P2 is fixed: Firm1's profit maximizing price   1 P1 12 4P1  P2 0 Firm1' s reaction curve  P1 3 1 4P2 Firm 2's reaction curve  P2 3 1 4P1 Chapter 12 Slide 56 Nash Equilibrium in Prices P1 Firm 2’s Reaction Curve Collusive Equilibrium $6 $4 Firm 1’s Reaction Curve Nash Equilibrium $4 Chapter 12 $6 P2 Slide 57 Nash Equilibrium in Prices  Does the Stackelberg model prediction for first mover hold when price is the variable instead of quantity? Hint: Chapter 12 Would you want to set price first? Slide 58 A Pricing Problem for Procter & Gamble Differentiated Differentiated Products Products  Scenario 1) Procter & Gamble, Kao Soap, Ltd., and Unilever, Ltd were entering the market for Gypsy Moth Tape. 2) All three would be choosing their prices at the same time. Chapter 12 Slide 59 A Pricing Problem for Procter & Gamble Differentiated Differentiated Products Products  Scenario 3) Procter & Gamble had to consider competitors prices setting their price. 4) Chapter 12 when FC = $480,000/month and VC = $1/unit for all firms Slide 60 A Pricing Problem for Procter & Gamble Differentiated Differentiated Products Products  Scenario 5) P&G’s demand curve was: Q = 3,375P-3.5(PU).25(PK).25  Chapter 12 Where P, PU , PK are P&G’s, Unilever’s, and Kao’s prices respectively Slide 61 A Pricing Problem for Procter & Gamble Differentiated Differentiated Products Products  Problem  What price should P&G choose and what is the expected profit? Chapter 12 Slide 62 P&G’s Profit (in thousands of $ per month) Competitor’s (Equal) Prices ($) P&G’s Price ($) 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.10 -226 -215 -204 -194 -183 -174 -165 -155 1.20 -106 -89 -73 -58 -43 -28 -15 -2 1.30 -56 -37 -19 2 15 31 47 62 1.40 -44 -25 -6 12 29 46 62 78 1.50 -52 -32 -15 3 20 36 52 68 1.60 -70 -51 -34 -18 -1 14 30 44 1.70 -93 -76 -59 -44 -28 -13 1 15 1.80 -118 -102 -87 -72 -57 -44 -30 -17 A Pricing Problem for Procter & Gamble  What Do You Think? 1) Why would each firm choose a price of $1.40? Hint: Think Nash Equilibrium 2) What is the profit maximizing price with collusion? Chapter 12 Slide 64 Competition Versus Collusion: The Prisoners’ Dilemma  Why wouldn’t each firm set the collusion price independently and earn the higher profits that occur with explicit collusion? Chapter 12 Slide 65 Competition Versus Collusion: The Prisoners’ Dilemma  Assume: FC $20andVC $0 Firm1's demand : Q 12 2P1  P2 Firm2's demand : Q 12 2P2  P1 NashEquilibriu m: P $4  $12 Collusion : P $6  $16 Chapter 12 Slide 66 Competition Versus Collusion: The Prisoners’ Dilemma  Possible Pricing Outcomes: Firm1: P $6 Firm2: P $6  $16 P $6  2 P2Q2  20 P $4 (4)12 (2)(4)  6  20$20  1 P1Q1  20 (6)12 (2)(6)  4  20$4 Chapter 12 Slide 67 Payoff Matrix for Pricing Game Firm 2 Charge $4 Charge $4 Charge $6 $12, $12 $20, $4 $4, $20 $16, $16 Firm 1 Charge $6 Chapter 12 Slide 68 Competition Versus Collusion: The Prisoners’ Dilemma  These two firms are playing a noncooperative game.  Each firm independently does the best it can taking its competitor into account.  Question  Why will both firms both choose $4 when $6 will yield higher profits? Chapter 12 Slide 69 Competition Versus Collusion: The Prisoners’ Dilemma  An example in game theory, called the Prisoners’ Dilemma, illustrates the problem oligopolistic firms face. Chapter 12 Slide 70 Competition Versus Collusion: The Prisoners’ Dilemma  Scenario  Two prisoners have been accused of collaborating in a crime.  They are in separate jail cells and cannot communicate.  Each Chapter 12 has been asked to confess to the crime. Slide 71 Payoff Matrix for Prisoners’ Dilemma Prisoner B Confess Confess Prisoner A Don’t confess Chapter 12 -5, -5 Don’t confess -1, -10 Would you choose to confess? -10, -1 -2, -2 Slide 72 Payoff Matrix for the P & G Prisoners’ Dilemma  Conclusions: Oligipolistic Markets 1) Collusion will lead to greater profits 2) Explicit and implicit collusion is possible 3) Once collusion exists, the profit motive to break and lower price is significant Chapter 12 Slide 73 Payoff Matrix for the P&G Pricing Problem Unilever and Kao Charge $1.40 Charge $1.40 P&G $29, $11 What price should P & G choose? Charge $1.50 Chapter 12 $12, $12 Charge $1.50 $3, $21 $20, $20 Slide 74 Implications of the Prisoners’ Dilemma for Oligipolistic Pricing  Observations of Oligopoly Behavior 1) In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur. Chapter 12 Slide 75 Implications of the Prisoners’ Dilemma for Oligipolistic Pricing  Observations of Oligopoly Behavior 2) In other oligopoly markets, the firms are very aggressive and collusion is not possible. Chapter 12  Firms are reluctant to change price because of the likely response of their competitors.  In this case prices tend to be relatively rigid. Slide 76 The Kinked Demand Curve $/Q If the producer raises price the competitors will not and the demand will be elastic. If the producer lowers price the competitors will follow and the demand will be inelastic. D Quantity Chapter 12 MR Slide 77 The Kinked Demand Curve $/Q So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant. MC’ P* MC D Quantity Q* Chapter 12 MR Slide 78 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing Price Price Signaling Signaling && Price Price Leadership Leadership  Price Signaling Implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit Chapter 12 Slide 79 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing Price Price Signaling Signaling && Price Price Leadership Leadership  Price Leadership Pattern of pricing in which one firm regularly announces price changes that other firms then match Chapter 12 Slide 80 Implications of the Prisoners’ Dilemma for Oligopolistic Pricing  The Dominant Firm Model  In some oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies the remainder of the market. large firm might then act as the dominant firm, setting a price that maximized its own profits.  The Chapter 12 Slide 81 Price Setting by a Dominant Firm Price D SF The dominant firm’s demand curve is the difference between market demand (D) and the supply of the fringe firms (SF). P1 MCD P* DD P2 QF QD Chapter 12 QT MRD At this price, fringe firms sell QF, so that total sales are QT. Quantity Slide 82 Cartels  Characteristics 1) Explicit agreements to set output and price 2) Chapter 12 May not include all firms Slide 83 Cartels  Characteristics 3) Most often international  Examples of successful cartels  OPEC  International Bauxite Association  Mercurio Europeo Chapter 12  Examples of unsuccessful cartels  Copper  Tin  Coffee  Tea  Cocoa Slide 84 Cartels  Characteristics 4) Chapter 12 Conditions for success  Competitive alternative sufficiently deters cheating  Potential of monopoly power--inelastic demand Slide 85 Cartels  Comparing OPEC to CIPEC  Most cartels involve a portion of the market which then behaves as the dominant firm Chapter 12 Slide 86 The OPEC Oil Cartel Price SC TD TD is the total world demand curve for oil, and SC is the competitive supply. OPEC’s demand is the difference between the two. OPEC’s profits maximizing quantity is found at the intersection of its MR and MC curves. At this quantity OPEC charges price P*. P* DOPEC MCOPEC MROPEC QOPEC Chapter 12 Quantity Slide 87 Cartels  About OPEC  Very  TD low MC is inelastic  Non-OPEC D OPEC Chapter 12 supply is inelastic is relatively inelastic Slide 88 The OPEC Oil Cartel SC TD Price The price without the cartel: •Competitive price (PC) where DOPEC = MCOPEC P* DOPEC MCOPEC Pc MROPEC QC Chapter 12 QOPEC QT Quantity Slide 89 The CIPEC Copper Cartel Price •TD and SC are relatively elastic •DCIPEC is elastic •CIPEC has little monopoly power •P* is closer to PC TD SC MCCIPEC DCIPEC P* PC MRCIPEC QCIPEC Chapter 12 QC QT Quantity Slide 90 Cartels  Observations  To Chapter 12 be successful:  Total demand must not be very price elastic  Either the cartel must control nearly all of the world’s supply or the supply of noncartel producers must not be price elastic Slide 91 The Cartelization of Intercollegiate Athletics  Observations 1) Large number of firms (colleges) 2) Large number of consumers (fans) 3) Very high profits Chapter 12 Slide 92 The Cartelization of Intercollegiate Athletics  Question  How can we explain high profits in a competitive market? (Hint: Think cartel and the NCAA) Chapter 12 Slide 93 The Milk Cartel  1990s with less government support, the price of milk fluctuated more widely  In response, the government permitted six New England states to form a milk cartel (Northeast Interstate Dairy Compact -NIDC) Chapter 12 Slide 94 The Milk Cartel  1999 legislation allowed dairy farmers in Northeastern states surrounding NIDC to join NIDC, 7 in 16 Southern states to form a new regional cartel.  Soy milk may become more popular. Chapter 12 Slide 95 Summary  In a monopolistically competitive market, firms compete by selling differentiated products, which are highly substitutable.  In an oligopolistic market, only a few firms account for most or all of production. Chapter 12 Slide 96 Summary  In the Cournot model of oligopoly, firms make their output decisions at the same time, each taking the other’s output as fixed.  In the Stackelberg model, one firm sets its output first. Chapter 12 Slide 97 Summary  The Nash equilibrium concept can also be applied to markets in which firms produce substitute goods and compete by setting price.  Firms would earn higher profits by collusively agreeing to raise prices, but the antitrust laws usually prohibit this. Chapter 12 Slide 98 Summary  The Prisoners’ Dilemma creates price rigidity in oligopolistic markets.  Price leadership is a form of implicit collusion that sometimes gets around the Prisoners Dilemma.  In a cartel, producers explicitly collude in setting prices and output levels. Chapter 12 Slide 99 End of Chapter 12 Monopolistic Competition and Oligopoly