Monopolistic Competition and Oligopoly (Chapter 12)
اسلاید 1: Chapter 12Monopolistic Competition and Oligopoly
اسلاید 2: Chapter 12Slide 2Topics to be DiscussedMonopolistic CompetitionOligopolyPrice CompetitionCompetition Versus Collusion: The Prisoners’ Dilemma
اسلاید 3: Chapter 12Slide 3Topics to be DiscussedImplications of the Prisoners’ Dilemma for Oligopolistic PricingCartels
اسلاید 4: Chapter 12Slide 4Monopolistic CompetitionCharacteristics1)Many firms2)Free entry and exit3)Differentiated product
اسلاید 5: Chapter 12Slide 5Monopolistic CompetitionThe amount of monopoly power depends on the degree of differentiation.Examples of this very common market structure include:ToothpasteSoapCold remedies
اسلاید 6: Chapter 12Slide 6Monopolistic CompetitionToothpaste Crest and monopoly powerProcter & Gamble is the sole producer of CrestConsumers can have a preference for Crest---taste, reputation, decay preventing efficacyThe greater the preference (differentiation) the higher the price.
اسلاید 7: Chapter 12Slide 7Monopolistic CompetitionQuestionDoes Procter & Gamble have much monopoly power in the market for Crest?
اسلاید 8: Chapter 12Slide 8Monopolistic CompetitionThe Makings of Monopolistic CompetitionTwo important characteristicsDifferentiated but highly substitutable productsFree entry and exit
اسلاید 9: A Monopolistically Competitive Firm in the Short and Long RunQuantity$/QQuantity$/QMCACMCACDSRMRSRDLRMRLRQSRPSRQLRPLRShort RunLong Run
اسلاید 10: Chapter 12Slide 10Observations (short-run)Downward sloping demand--differentiated productDemand is relatively elastic--good substitutesMR < PProfits are maximized when MR = MCThis firm is making economic profitsA Monopolistically Competitive Firm in the Short and Long Run
اسلاید 11: Chapter 12Slide 11Observations (long-run)Profits will attract new firms to the industry (no barriers to entry)The old firm’s demand will decrease to DLRFirm’s output and price will fallIndustry output will riseNo economic profit (P = AC)P > MC -- some monopoly powerA Monopolistically Competitive Firm in the Short and Long Run
اسلاید 12: Deadweight lossMCACComparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium$/QQuantity$/QD = MRQCPCMCACDLRMRLRQMCPQuantityPerfect CompetitionMonopolistic Competition
اسلاید 13: Chapter 12Slide 13Monopolistic CompetitionMonopolistic Competition and Economic EfficiencyThe 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.
اسلاید 14: Chapter 12Slide 14Monopolistic CompetitionMonopolistic Competition and Economic EfficiencyWith no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists.
اسلاید 15: Chapter 12Slide 15Monopolistic CompetitionQuestions1)If the market became competitive, what would happen to output and price?2)Should monopolistic competition be regulated?
اسلاید 16: Chapter 12Slide 16Monopolistic CompetitionQuestions3)What is the degree of monopoly power?4)What is the benefit of product diversity?
اسلاید 17: Chapter 12Slide 17Monopolistic Competition in the Market for Colas and CoffeeThe markets for soft drinks and coffee illustrate the characteristics of monopolistic competition.
اسلاید 18: Chapter 12Slide 18Elasticities of Demand for Brands of Colas and CoffeeColas:Royal Crown-2.4Coke-5.2 to -5.7Ground Coffee:Hills Brothers-7.1Maxwell House-8.9Chase and Sanborn-5.6BrandElasticity of Demand
اسلاید 19: Chapter 12Slide 19Questions1)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.Elasticities of Demand for Brands of Colas and Coffee
اسلاید 20: Chapter 12Slide 20OligopolyCharacteristicsSmall number of firmsProduct differentiation may or may not existBarriers to entry
اسلاید 21: Chapter 12Slide 21OligopolyExamplesAutomobilesSteelAluminumPetrochemicalsElectrical equipmentComputers
اسلاید 22: Chapter 12Slide 22OligopolyThe barriers to entry are:NaturalScale economiesPatentsTechnologyName recognition
اسلاید 23: Chapter 12Slide 23OligopolyThe barriers to entry are:Strategic actionFlooding the marketControlling an essential input
اسلاید 24: Chapter 12Slide 24OligopolyManagement ChallengesStrategic actionsRival behaviorQuestionWhat are the possible rival responses to a 10% price cut by Ford?
اسلاید 25: Chapter 12Slide 25OligopolyEquilibrium in an Oligopolistic MarketIn 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.
اسلاید 26: Chapter 12Slide 26OligopolyEquilibrium in an Oligopolistic MarketDefining EquilibriumFirms doing the best they can and have no incentive to change their output or priceAll firms assume competitors are taking rival decisions into account.
اسلاید 27: Chapter 12Slide 27OligopolyNash EquilibriumEach firm is doing the best it can given what its competitors are doing.
اسلاید 28: Chapter 12Slide 28OligopolyThe Cournot ModelDuopolyTwo firms competing with each otherHomogenous goodThe output of the other firm is assumed to be fixed
اسلاید 29: Chapter 12Slide 29MC150MR1(75)D1(75)12.5If Firm 1 thinks Firm 2 will produce 75 units, its demand curve is shifted to the left by this amount. Firm 1’s Output DecisionQ1P1What is the output of Firm 1if Firm 2 produces 100 units?D1(0)MR1(0)If Firm 1 thinks Firm 2 will produce nothing, its demandcurve, D1(0), is the market demand curve.D1(50)MR1(50)25If Firm 1 thinks Firm 2 will produce 50 units, its demand curve is shifted to the left by this amount.
اسلاید 30: Chapter 12Slide 30OligopolyThe Reaction CurveA firm’s profit-maximizing output is a decreasing schedule of the expected output of Firm 2.
اسلاید 31: Chapter 12Slide 31Firm 2’s ReactionCurve Q*2(Q2)Firm 2’s reaction curve shows how much itwill produce as a function of how much it thinks Firm 1 will produce. Reaction Curves and Cournot EquilibriumQ2Q1255075100255075100Firm 1’s ReactionCurve Q*1(Q2)xxxxFirm 1’s reaction curve shows how much itwill produce as a function of how much it thinks Firm 2 will produce. The x’s correspond to the previous model.In Cournot equilibrium, eachfirm correctly assumes howmuch its competitors willproduce and therebymaximize its own profits.CournotEquilibrium
اسلاید 32: Chapter 12Slide 32OligopolyQuestions1)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?
اسلاید 33: Chapter 12Slide 33OligopolyAn Example of the Cournot EquilibriumDuopolyMarket demand is P = 30 - Q where Q = Q1 + Q2MC1 = MC2 = 0The Linear Demand Curve
اسلاید 34: Chapter 12Slide 34OligopolyAn Example of the Cournot EquilibriumFirm 1’s Reaction CurveThe Linear Demand Curve
اسلاید 35: Chapter 12Slide 35OligopolyAn Example of the Cournot EquilibriumThe Linear Demand Curve
اسلاید 36: Chapter 12Slide 36OligopolyAn Example of the Cournot EquilibriumThe Linear Demand Curve
اسلاید 37: Chapter 12Slide 37Duopoly ExampleQ1Q2Firm 2’sReaction Curve3015Firm 1’sReaction Curve15301010Cournot EquilibriumThe demand curve is P = 30 - Q andboth firms have 0 marginal cost.
اسلاید 38: Chapter 12Slide 38OligopolyProfit Maximization with Collusion
اسلاید 39: Chapter 12Slide 39OligopolyContract CurveQ1 + Q2 = 15Shows all pairs of output Q1 and Q2 that maximizes total profitsQ1 = Q2 = 7.5Less output and higher profits than the Cournot equilibriumProfit Maximization with Collusion
اسلاید 40: Chapter 12Slide 40Firm 1’sReaction CurveFirm 2’sReaction CurveDuopoly ExampleQ1Q230301010Cournot Equilibrium1515Competitive Equilibrium (P = MC; Profit = 0)CollusionCurve7.57.5Collusive EquilibriumFor the firm, collusion is the bestoutcome followed by the CournotEquilibrium and then the competitive equilibrium
اسلاید 41: Chapter 12Slide 41First Mover Advantage-- The Stackelberg ModelAssumptionsOne firm can set output firstMC = 0Market demand is P = 30 - Q where Q = total outputFirm 1 sets output first and Firm 2 then makes an output decision
اسلاید 42: Chapter 12Slide 42Firm 1Must consider the reaction of Firm 2Firm 2Takes Firm 1’s output as fixed and therefore determines output with the Cournot reaction curve: Q2 = 15 - 1/2Q1First Mover Advantage-- The Stackelberg Model
اسلاید 43: Chapter 12Slide 43Firm 1Choose Q1 so that:First Mover Advantage-- The Stackelberg Model
اسلاید 44: Chapter 12Slide 44Substituting Firm 2’s Reaction Curve for Q2:First Mover Advantage-- The Stackelberg Model
اسلاید 45: Chapter 12Slide 45ConclusionFirm 1’s output is twice as large as firm 2’sFirm 1’s profit is twice as large as firm 2’sQuestionsWhy is it more profitable to be the first mover?Which model (Cournot or Shackelberg) is more appropriate?First Mover Advantage-- The Stackelberg Model
اسلاید 46: Chapter 12Slide 46Price CompetitionCompetition 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.
اسلاید 47: Chapter 12Slide 47Price CompetitionAssumptionsHomogenous goodMarket demand is P = 30 - Q where Q = Q1 + Q2MC = $3 for both firms and MC1 = MC2 = $3Bertrand Model
اسلاید 48: Chapter 12Slide 48Price CompetitionAssumptionsThe Cournot equilibrium: Assume the firms compete with price, not quantity.Bertrand Model
اسلاید 49: Chapter 12Slide 49Price CompetitionHow will consumers respond to a price differential? (Hint: Consider homogeneity)The Nash equilibrium:P = MC; P1 = P2 = $3Q = 27; Q1 & Q2 = 13.5 Bertrand Model
اسلاید 50: Chapter 12Slide 50Price CompetitionWhy not charge a higher price to raise profits? How does the Bertrand outcome compare to the Cournot outcome?The Bertrand model demonstrates the importance of the strategic variable (price versus output).Bertrand Model
اسلاید 51: Chapter 12Slide 51Price CompetitionCriticismsWhen 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.Bertrand Model
اسلاید 52: Chapter 12Slide 52Price CompetitionPrice Competition with Differentiated ProductsMarket shares are now determined not just by prices, but by differences in the design, performance, and durability of each firm’s product.
اسلاید 53: Chapter 12Slide 53Price CompetitionAssumptionsDuopolyFC = $20VC = 0Differentiated Products
اسلاید 54: Chapter 12Slide 54Price CompetitionAssumptionsFirm 1’s demand is Q1 = 12 - 2P1 + P2Firm 2’s demand is Q2 = 12 - 2P1 + P1P1 and P2 are prices firms 1 and 2 charge respectivelyQ1 and Q2 are the resulting quantities they sell Differentiated Products
اسلاید 55: Chapter 12Slide 55Price CompetitionDetermining Prices and OutputSet prices at the same timeDifferentiated Products
اسلاید 56: Chapter 12Slide 56Price CompetitionDetermining Prices and OutputFirm 1: If P2 is fixed:Differentiated Products
اسلاید 57: Chapter 12Slide 57Firm 1’s Reaction CurveNash Equilibrium in PricesP1P2Firm 2’s Reaction Curve$4$4Nash Equilibrium$6$6Collusive Equilibrium
اسلاید 58: Chapter 12Slide 58Nash Equilibrium in PricesDoes the Stackelberg model prediction for first mover hold when price is the variable instead of quantity?Hint: Would you want to set price first?
اسلاید 59: Chapter 12Slide 59A Pricing Problem for Procter & GambleScenario1)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.Differentiated Products
اسلاید 60: Chapter 12Slide 60Scenario3)Procter & Gamble had to consider competitors prices when setting their price.4)FC = $480,000/month and VC = $1/unit for all firmsDifferentiated ProductsA Pricing Problem for Procter & Gamble
اسلاید 61: Chapter 12Slide 61Scenario5)P&G’s demand curve was:Q = 3,375P-3.5(PU).25(PK).25Where P, PU , PK are P&G’s, Unilever’s, and Kao’s prices respectivelyDifferentiated ProductsA Pricing Problem for Procter & Gamble
اسلاید 62: Chapter 12Slide 62ProblemWhat price should P&G choose and what is the expected profit?Differentiated ProductsA Pricing Problem for Procter & Gamble
اسلاید 63: P&G’s Profit (in thousands of $ per month)1.10-226-215-204-194-183-174-165-1551.20-106-89-73-58-43-28-15-21.30-56-37-192153147621.40-44-25-612294662781.50-52-32-153203652681.60-70-51-34-18-11430441.70-93-76-59-44-28-131151.80-118-102-87-72-57-44-30-17Competitor’s (Equal) Prices ($) P&G’sPrice ($)1.101.201.301.401.501.601.701.80
اسلاید 64: Chapter 12Slide 64What 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?A Pricing Problem for Procter & Gamble
اسلاید 65: Chapter 12Slide 65Competition Versus Collusion: The Prisoners’ DilemmaWhy wouldn’t each firm set the collusion price independently and earn the higher profits that occur with explicit collusion?
اسلاید 66: Chapter 12Slide 66Assume:Competition Versus Collusion: The Prisoners’ Dilemma
اسلاید 67: Chapter 12Slide 67Possible Pricing Outcomes:Competition Versus Collusion: The Prisoners’ Dilemma
اسلاید 68: Chapter 12Slide 68Payoff Matrix for Pricing GameFirm 2Firm 1Charge $4Charge $6Charge $4Charge $6$12, $12$20, $4$16, $16$4, $20
اسلاید 69: Chapter 12Slide 69These two firms are playing a noncooperative game.Each firm independently does the best it can taking its competitor into account.QuestionWhy will both firms both choose $4 when $6 will yield higher profits?Competition Versus Collusion: The Prisoners’ Dilemma
اسلاید 70: Chapter 12Slide 70An example in game theory, called the Prisoners’ Dilemma, illustrates the problem oligopolistic firms face.Competition Versus Collusion: The Prisoners’ Dilemma
اسلاید 71: Chapter 12Slide 71ScenarioTwo prisoners have been accused of collaborating in a crime.They are in separate jail cells and cannot communicate.Each has been asked to confess to the crime.Competition Versus Collusion: The Prisoners’ Dilemma
اسلاید 72: Chapter 12Slide 72-5, -5-1, -10-2, -2-10, -1Payoff Matrix for Prisoners’ DilemmaPrisoner AConfessDon’t confessConfessDon’tconfessPrisoner BWould you choose to confess?
اسلاید 73: Chapter 12Slide 73Payoff Matrix for the P & G Prisoners’ DilemmaConclusions: Oligipolistic Markets1)Collusion will lead to greater profits2)Explicit and implicit collusion is possible3)Once collusion exists, the profit motive to break and lower price is significant
اسلاید 74: Chapter 12Slide 74Charge $1.40Charge $1.50Charge$1.40Unilever and KaoCharge$1.50P&G$12, $12$29, $11$3, $21$20, $20Payoff Matrix for the P&G Pricing ProblemWhat price should P & G choose?
اسلاید 75: Chapter 12Slide 75Implications of the Prisoners’ Dilemma for Oligipolistic PricingObservations of Oligopoly Behavior1)In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur.
اسلاید 76: Chapter 12Slide 76Observations of Oligopoly Behavior2)In other oligopoly markets, the firms are very aggressive and collusion is not possible. Firms are reluctant to change price because of the likely response of their competitors.In this case prices tend to be relatively rigid.Implications of the Prisoners’ Dilemma for Oligipolistic Pricing
اسلاید 77: Chapter 12Slide 77The Kinked Demand Curve$/QQuantityMRDIf the producer lowers price thecompetitors will follow and the demand will be inelastic.If the producer raises price thecompetitors will not and the demand will be elastic.
اسلاید 78: Chapter 12Slide 78The Kinked Demand Curve$/QDP*Q*MCMC’So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant. MRQuantity
اسلاید 79: Chapter 12Slide 79Implications of the Prisoners’ Dilemma for Oligopolistic PricingPrice SignalingImplicit collusion in which a firm announces a price increase in the hope that other firms will follow suitPrice Signaling & Price Leadership
اسلاید 80: Chapter 12Slide 80Implications of the Prisoners’ Dilemma for Oligopolistic PricingPrice LeadershipPattern of pricing in which one firm regularly announces price changes that other firms then matchPrice Signaling & Price Leadership
اسلاید 81: Chapter 12Slide 81Implications of the Prisoners’ Dilemma for Oligopolistic PricingThe Dominant Firm ModelIn 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.The large firm might then act as the dominant firm, setting a price that maximized its own profits.
اسلاید 82: Chapter 12Slide 82Price Setting by a Dominant FirmPriceQuantityDDDQDP*At this price, fringe firmssell QF, so that totalsales are QT.P1QFQTP2MCDMRDSFThe dominant firm’s demandcurve is the difference betweenmarket demand (D) and the supplyof the fringe firms (SF).
اسلاید 83: Chapter 12Slide 83CartelsCharacteristics1) Explicit agreements to set output and price2)May not include all firms
اسلاید 84: Chapter 12Slide 84CartelsExamples of successful cartelsOPECInternational Bauxite AssociationMercurio EuropeoExamples of unsuccessful cartelsCopperTinCoffeeTeaCocoaCharacteristics3) Most often international
اسلاید 85: Chapter 12Slide 85CartelsCharacteristics4) Conditions for successCompetitive alternative sufficiently deters cheatingPotential of monopoly power--inelastic demand
اسلاید 86: Chapter 12Slide 86CartelsComparing OPEC to CIPECMost cartels involve a portion of the market which then behaves as the dominant firm
اسلاید 87: Chapter 12Slide 87The OPEC Oil CartelPriceQuantityMROPECDOPECTDSCMCOPECTD is the total world demandcurve for oil, and SC is the competitive supply. OPEC’s demand is the differencebetween the two.QOPECP*OPEC’s profits maximizingquantity is found at the intersection of its MR andMC curves. At this quantityOPEC charges price P*.
اسلاید 88: Chapter 12Slide 88CartelsAbout OPECVery low MCTD is inelasticNon-OPEC supply is inelasticDOPEC is relatively inelastic
اسلاید 89: Chapter 12Slide 89The OPEC Oil CartelPriceQuantityMROPECDOPECTDSCMCOPECQOPECP*The price without the cartel:Competitive price (PC) where DOPEC = MCOPECQCQTPc
اسلاید 90: Chapter 12Slide 90The CIPEC Copper CartelPriceQuantityMRCIPECTDDCIPECSCMCCIPECQCIPECP*PCQCQTTD and SC are relatively elasticDCIPEC is elasticCIPEC has little monopoly powerP* is closer to PC
اسلاید 91: Chapter 12Slide 91CartelsObservationsTo be successful:Total demand must not be very price elasticEither the cartel must control nearly all of the world’s supply or the supply of noncartel producers must not be price elastic
اسلاید 92: Chapter 12Slide 92The Cartelization of Intercollegiate AthleticsObservations1)Large number of firms (colleges)2)Large number of consumers (fans)3)Very high profits
اسلاید 93: Chapter 12Slide 93QuestionHow can we explain high profits in a competitive market? (Hint: Think cartel and the NCAA)The Cartelization of Intercollegiate Athletics
اسلاید 94: Chapter 12Slide 94The Milk Cartel1990s with less government support, the price of milk fluctuated more widelyIn response, the government permitted six New England states to form a milk cartel (Northeast Interstate Dairy Compact -- NIDC)
اسلاید 95: Chapter 12Slide 95The Milk Cartel1999 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.
اسلاید 96: Chapter 12Slide 96SummaryIn 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.
اسلاید 97: Chapter 12Slide 97SummaryIn 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.
اسلاید 98: Chapter 12Slide 98SummaryThe 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.
اسلاید 99: Chapter 12Slide 99SummaryThe 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.
اسلاید 100: End of Chapter 12Monopolistic Competition and Oligopoly
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