University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly


 Tracy Fields
 7 months ago
 Views:
Transcription
1 1 Introduction University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly There are many real life examples that the participants have nonnegligible influence on the market. In such markets, every firm is aware that other firms decisions will have profound effects on it, tries to anticipate these decisions, and chooses a best decision based on this anticipation. Think of newspapers, TV channels, mobile service providers, or even MBA programmes. Between the two extremes of perfect competition and monopoly, economists have identified two interesting intermediate market structures: monopolistic competition and oligopoly. Monopolistic competition, first proposed by Chamberlain and Joan Robinson in late 1920s, is a market structure characterized by both monopoly and competition. In the original model the goods sold in the market are differentiated, and hence each firm has some market power the firm will not lose all its customers by rising its price above the market price (hence monopoly). On the other hand, because of easy entry and exit, there are many firms in themarketandeachfirm will just earn a zero profit (hence competition). There has been a great variety of models of monopolistic competition since Chamberlain and Robinson. The framework is particularly useful for us to study product quality choice. The Chamberlain model (known as the location model) also places an instrumental role in the study of political competition. Finally, in 1980s monopolistic competition was employed to help develop new international trade models to understand intraindustrial trade, viz., why Germany and US trade with each other. (Future generations will accolade Paul Krugman as a central hero in the revolution of trade theory, comparable to David Ricardo in his time.) In this lecture note, we will concentrate instead on oligopoly a market structure in which there are only a few firms, and entry barriers are so high that the incumbent firms can earn positive profits without luring new firms to enter. The particular type of oligopoly that deserves most of our attention is duopoly an oligopoly with just two firms. There are three different models of duopoly/oligopoly and we will go through one by one. 1
2 Figure 1: 2 The Role of Beliefs and Strategic Interaction To gain an understanding of oligopoly interdependence, consider a situation where several firms selling differentiated products compete in an oligopoly. In determining what price and output to charge, one firm must consider the impact of its decisions on other firms in the industry. For example, if the price for the product is lowered, will other firms lower their prices or maintain their existing prices? If the price is increased, will other firms do likewise or maintain their current prices? The optimal decision of whether to raise or lower price will depend on how the firm believes other firms will respond. If other firms lower their prices when the firm lowers its price, it will not sell as much as it would if the other firms maintained their existing prices. As a point of reference, suppose the firm initially is at point B in Figure 1, charging a price of P 0. Demand curve D 1 is based on the assumption that rivals will match any price change, while D 2, is based on the assumption that they will not match a price change. Note that demand is more inelastic 2
3 where rivals match a price change than when they do not. The reason for this is simple. For a given price reduction, a firm will sell more if rivals do not cut their prices (D 2 ) than it will if they lower their prices (D 1 ). In effect, a price reduction increases quantity demanded only slightly when rivals respond by lowering their prices. Similarly, for a given price increase, a firm will sell more where rivals also raise their prices (D 1 )thanitwill when they maintain their existing prices (D 2 ). 3 Cournot Competition An industry is characterized as Cournot oligopoly if 1. There are few firms in the market serving many consumers. 2. The firms produce either differentiated or homogeneous products. 3. Each firm believes rivals will hold their output constant if it changes its output. 4. Barriers to entry exist. 3.1 Reaction Functions and Equilibrium. To highlight the implications of Cournot oligopoly, suppose there are only two firms competing in a Cournot duopoly. Since this is a Cournot duopoly, firm 1 believes firm 2 will hold its output constant as it changes its own output. The profitmaximizing level of output for firm 1 depends on the output of firm 2. This information is summarized in the reaction function. A reaction function defines the profitmaximizing level of output for a firm for given output levels of the other firm. More formally, the profitmaximizing level of output for firm 1 given that firm 2 produces Q 2 units of output is Q 1 = r 1 (Q 2 ). Similarly, the profitmaximizing level of output for firm 2 given that firm 1 produces Q 1 units of output is given by Q 2 = r 2 (Q 1 ). Cournot reaction functions for a duopoly are illustrated in Figure 2, where firm 1 s output is measured on the horizontal axis and firm 2 s output is measured on the vertical axis. 3
4 Figure 2: To understand why reaction functions are shaped as they are, let us highlight a few important points in the diagram. First, if firm 2 produced zero units of output, the profitmaximizing level of output for firm 1 would be Q M 1, since this is the point on firm 1 s reaction function (r 1)thatcorresponds to zero units of Q 2. This combination of outputs corresponds to the situation where only firm 1 is producing a positive level of output; thus, Q M 1 corresponds to the situation where firm 1 is a monopolist. If instead of producing zero units of output firm 2 produced Q 2 units, the profitmaximizing level of output for firm 1 would be Q 1, since this is the point on r 1 that corresponds to an output of Q 2 by firm 2. The reason the profitmaximizing level of output for firm 1 decreases as firm 2 s output increases is as follows. The demand for firm 1 s product depends on the output produced by other firms in the market. When firm 2 increases its level of output, the demand and marginal revenue for firm 1 decline. The profitmaximizing response by firm1istoreduceitslevelof output. To examine equilibrium in a Cournot duopoly, suppose firm 1 produce units of output. Given this output, the profitmaximizing level of output Q M 1 4
5 for firm 2 will correspond to point A on r 2 in Figure 2. Given this positive level of output by firm 2, the profitmaximizing level of output for firm 1 will no longer be Q M 1, but will correspond to point B on r 1. Given this reduced level of output by firm 1, point C will be the point on firm 2 s reaction function that maximizes profits. Given this new output by firm 2, firm 1 will again reduce output to point D on its reaction function. How long will these changes in output continue? Until point E in Figure 2 is reached. At point E, firm 1 produces Q 1 and firm 2 produces Q 2 ; unit Neither firm has an incentive to change its output given that it believes the other firm will hold its output constant at that level. Point E thus corresponds to the Cournot equilibrium. Cournot equilibrium is the situation where neither firm has an incentive to change its output given the output of the other firm. Graphically, this condition corresponds to the intersection of the reaction curves. Thus far, our analysis of Cournot oligopoly has been graphical rather than algebraic. However, given estimates of the demand and costs within a Cournot oligopoly, we can explicitly solve for the Cournot equilibrium. Howdowedothis? Tomaximizeprofits, a manager in a Cournot oligopoly produces where marginal revenue equals marginal cost. The calculation of marginal cost is straight forward; it is done just as in the other market structures we have analyzed. The calculation of marginal revenue is a little more subtle. Consider the following formula: Formula: Marginal Revenue for Cournot Duopoly. If the (inverse) demand in a homogeneousproduct Cournot duopoly is P = a b(q 1 + Q 2 ), where a and b are positive constants, then the marginal revenues of firms 1 and 2 are MR 1 (Q 1,Q 2 ) = a bq 2 2bQ 1 MR 2 (Q 1,Q 2 ) = a bq 1 2bQ 2 when firm 2 increases its output, firm 1 s marginal revenue falls. This is because the increase in output by firm 2 lowers the market price, resulting in lower marginal revenue for firm 1. Since each firm s marginal revenue depends on the other firm s output, the profit maximizing output of each firm also depends on the other firm s output. This dependence is summarized in a firm s reaction function. 5
6 3.2 Model Assumptions: two identical firms (duopoly); homogenous product; constant marginal cost c 1 and c 2 (no fixed costs); one period simultaneous moves; linear demand p = A B(q 1 + q 2 ); quantity as choice variable firm 1 s objective function: max q 1 π 1 (q 1,q 2 )=(A B (q 1 + q 2 ))q 1 c 1 q 1 The first order condition for a local maximum is That is, dπ 1 (q 1,q 2 ) = A B(q 1 + q 2 ) Bq 1 c dq 1 {z } {z} 1 =0 MC MR q 1 (q 2 )=(A Bq 2 c 1 ) /2B. (1) which is called firm 1 s best response, or reaction function. The strategic interaction between the two firms optimal decisions are illustrated in such a reaction function. What is the best for firm 1 depends what the other firm is going to do. Note that (1) shows that firm 1 s optimal choice is decreasing in q 2. That is, firm 1 will produce a lower level if it knows that firm 2 is getting more aggressive. If you ask what firm 1 s best action is, the answer you will get back is it depends. Similarly, we have firm 2 s best response function q 2 (q 1 )=(A Bq 1 c 2 ) /2B. (2) A Nash equilibrium requires that the q 2 anticipated by firm 1 must be equal to the actual q 2 chosen by firm 2, and the q 1 anticipated by firm 2 must be equal to the actual q 1 chosen by firm 1. Plotting the two curves in a diagram with axes of q 1 and q 2, we can easily see that they intersect only once and the horizontal and vertical ordinates of the point of intersection (q1,q 2 ) constitutes an equilibrium. 3.3 Isoprofit Curves. Now that you have a basic understanding of Cournot oligopoly, we will examine how to graphically determine the firm s profits. Recall that the profits of a firm in an oligopoly depend not only on the output it chooses to produce but also on the output produced by other firms in the oligopoly. In a duopoly, for instance, increases in firm 2 s output will reduce the price of the output. This is due to the law of demand: As more output is sold 6
7 Figure 3: in the market, the price consumers are willing and able to pay for the good declines. This will, of course, alter the profits of firm 1. The basic tool used to summarize the profits of a firm in Cournot oligopoly is an isoprofit curve, which defines the combinations of outputs of all firms that yield a given firm the same level of profits. Figure 3 presents the reaction function for firm 1 (r 1 ), along with three isoprofit curves(labeled π 0, π 1, and π 2 ). Four aspects of Figure 3 are important to understand: 1. Every point on a given isoprofit curve yields firm 1 the same level of profits. For instance, points F, A, and G all lie on the isoprofit curve labeled π 0 ; thus, each of these points yields profits of exactly π 0 for firm Isoprofit curves that lie closer to firm l s monopoly output (Q M 1 )are associated with higher profits for that firm. For instance, isoprofit curve π 2 implies higher profits than does π 1,andπ 1 is associated with higher profits than π 0. In other words, as we move down firm l s reaction function from point A to point C, firm l s profits increase. 7
8 3. The isoprofit curves for firm 1 reach their peak where they intersect firm l s reaction function. For instance, isoprofit curveπ 0 peaks at point A, where it intersects r 1 ; π 1 peaks at point B, where it intersects r 1,andsoon. 4. The isoprofit curves do not intersect one another. With an understanding of these four aspects of isoprofit curves, we now provide further insights into managerial decisions in a Cournot oligopoly. Recall that one assumption of Cournot oligopoly is that each firm takes as given the output decisions of rival firms and simply chooses its output to maximize profits given other firms output. This is illustrated in Figure 4, whereweassumefirm 2 s output is given by Q 2.Sincefirm 1 believes firm 2 will product this output regardless of what firm 1 does, it chooses its output level to maximize profits when firm 2 produces Q 2. One possibility is for firm1toproduceq A 1 units of output, which would correspond to point A on isoprofit curveπ A 1. However, this decision does not maximize profits, because by expanding output to Q B 1, firm1movestoahigherisoprofit curve (π B 1, which corresponds point B). Notice that profits can be further increased if firm 1 expands output to Q C 1, which is associated with isoprofit curve π C 1. It is not profitable for firm 1 to increase output beyond Q C 1, given that firm 2 produces Q 2?To see this, suppose firm 1 expanded output to, say, QD 1. This would result in a combination of outputs that corresponds to point D, whichliesonanisoprofit curve that yields lower profits. We conclude that the profit maximizing output for firm 1 is Q C 1 whenever firm 2 produces Q 2 units. This should not surprise you: This is exactly the output that corresponds to firm 1 s reaction function. To maximize profits, firm 1 pushes its isoprofit curveasfardownas possible (as close as possible to the monopoly point), until it is just tangent to the given output of firm 2. This tangency occurs at point C in Figure 4. We can use isoprofit curves to illustrate the profits of each firm in a Cournot equilibrium. Recall that Cournot equilibrium is determined by the intersection of the two firms reaction functions, such as point C in Figure 5. Firm l s isoprofit curve through point C is given by π C 1 and firm 2 s isoprofit curve is given by π C Changes in Marginal Costs. To see the effect of a change in marginal cost, suppose the firms initially are in equilibrium at point E in Figure 6, where firm 1 produces Q 1 units and 8
9 Figure 4: firm 2 produces Q 2 units. Now suppose firm 2 s marginal cost declines. At the given level of output, marginal revenue remains unchanged but marginal cost is reduced. This means that for firm 2, marginal revenue exceeds the lower marginal cost, and it is optimal to produce more output for any given level of Q 1. Graphically, this shifts firm 2 s reaction function up from r 2 to r2, leading to a new Cournot equilibrium at point F. Thus, the reduction in firm 2 s marginal cost leads to an increase in firm 2 s output, from Q 2 to Q 2, and a decline in firm l s output from Q 1 to Q 1. Firm 2 enjoys a larger market share due to its improved cost situation. 3.5 Collusion Whenever a market is dominated by only a few firms, firms can benefit at the expense of consumers by agreeing to restrict output or, equivalently, charge higher prices. Such an act by firms is known as collusion. In the next chapter, we will devote considerable attention to collusion; for now, it is useful to use the model of Cournot oligopoly to show why such an incentive exists. In Figure 7, point C corresponds to a Cournot equilibrium; it is the 9
10 Figure 5: 10
11 Figure 6: 11
12 Figure 7: 12
13 intersection of the reaction functions of the two firms in the market. The equilibrium profits of firm 1 are given by isoprofit curveπ C 1 and those of firm 2byπ C 2 Notice that the shaded lensshaped area in Figure 7 contains output levels for the two firms that yield higher profits for both firms than they earn in a Cournot equilibrium. For example, at point D each firm produces less output and enjoys greater profits, since each of the firm s isoprofit curves at point D is closer to the respective monopoly point. In effect, if each firm agreed to restrict output, the firms could charge higher prices and earn higher profits. The reason is easy to see. Firm l s profits would be highest at point A, where it is a monopolist. Firm 2 s profits would be highest at point B, whereitisamonopolist. Ifeachfirm agreed to produce an output that in total equaled the monopoly output, the firmswouldendupsomewhere on the line connecting points A and B. In other words, any combination of outputs along line AB would maximize total industry profits. The outputs on the line segment connecting points E and F in Figure 7 thus maximize total industry profits, and since they are inside the lensshaped area, they also yield both firms higher profits than would be earned if the firms produced at point C (the Cournot equilibrium). If the firms colluded by restricting output and splitting the monopoly profits, they would end up at a point like D, earning higher profits of π collude 1 and π collude 2. It is not easy for firms to reach such a collusive agreement, however. We will analyze this point in greater detail in the next chapter, but we can use our existing framework to see why collusion is sometimes difficult. Suppose firms agree to collude, with each firm producing the collusive output associated with point D in Figure 8 to earn collusive profits. Given that firm 2 produces Q collusive 2, firm 1 has an incentive to cheat on the collusive agreement by expanding output to point G. At this point, firm 1 earns even higher profits than it would by colluding, since π cheat 1 > π collude 1.This suggests that a firm can gain by inducing other firms to restrict output and then expanding its own output to earn higher profits at the expense of its collusion partners. Because firms know this incentive exists, it is often difficult for them to reach collusive agreements in the first place. This problem is amplified by the fact that firm 2 in Figure 8 earns less at point G(wherefirm 1 cheats) than it would have earned at point C (the Cournot equilibrium). 13
14 Figure 8: 14
15 4 Stackelberg Oligopoly Up until this point, we have analyzed oligopoly situations that are symmetric in that firm 2 is the mirror image of firm 1, In many oligopoly markets, however, firms differ from one another. In a Stackelberg oligopoly, firms differ with respect to when they make decisions. Specifically, one firm (the leader) is assumed to make an output decision before the other firms. Given knowledge of the leader s output, all other firms (the followers) take as given the leader s output and choose outputs that maximize profits. Thus, in a Stackelberg oligopoly, each follower behaves just like a Cournot oligopolist. However, firm 1 (the leader) does not act like a Cournot oligopolist. In fact, the leader does not take the followers outputs as given but instead chooses an output that maximizes profits given that each follower will react to this output decision according to a Cournot reaction function. An industry is characterized as a Stackelberg oligopoly if: 1. There are few firms in the market serving many consumers. 2. The firms produce either differentiated or homogeneous products. 3. A single firm (the leader) selects an output before all other firms choose their outputs. 4. All other firms (the followers) take as given the output of the leader and choose outputs that maximize profits given the leader s output. 5. Barriers to entry exist. To highlight a Stackelberg oligopoly, let us consider a situation where there are only two firms. Firm 1 is the leader and thus has a firstmover advantage; that is, firm 1 produces before firm 2. Firm 2 is the follower and maximizes profit given the output produced by the leader. Because the follower produces after the leader, the follower s profitmaximizing level of output is determined by its reaction function. This is denoted by r 2 in Figure 9. However, the leader knows the follower will react according to r 2.Consequently, the leader must choose the level of output that will maximize its profits given that the follower reacts to whatever the leader does. How does the leader choose the output level to produce? Since it knows the follower will produce along r 2, the leader simply chooses the point on the follower s reaction curve that corresponds to the highest level of its profits. Because the leader s profits increase as the isoprofit curves get closer to 15
16 Figure 9: 16
17 the monopoly output, the resulting choice by the leader will be at point S in Figure 9. This isoprofit curve,denotedπ S 1, yields the highest profits consistent with the follower s reaction function. It is tangent to firm 2 s reaction function. Thus, the leader produces Q S 1. The follower observes this output and produces Q S 2,whichistheprofitmaximizing response to QS 1. The corresponding profits of the leader are given by π S 1, and those of the follower by π S 2. Notice that the leader s profits are higher than they would be in Cournot equilibrium (point C), and the follower s profits are lower than in Cournot equilibrium. By getting to move first, the leader earns higher profits than would otherwise be the case. The algebraic solution for a Stackelberg oligopoly can also be obtained, provided firms have information about market demand and costs. In particular, recall that the follower s decision is identical to that of a Cournot model. For instance, with linear demand and constant marginal cost, the output of the follower is given by the reaction function Q 2 = r 2 (Q 1 )= a c 2 1 2b 2 Q 1, which is simply the follower s Cournot reaction function. However, the leader in the Stackelberg oligopoly takes into account this reaction function when it selects Q 1. With a linear inverse demand function and constant marginal costs, the leader s profits are ½ µ a c2 Π 1 = a b Q ¾ 2b 2 Q 1 Q 1 c 1 Q 1. The leader chooses Q 1 to maximize this profit expression. It turns out that the value of Q 1 that maximizes the leader s profits is Q 1 = a + c 2 2c 1. 2b Formula: Equilibrium Outputs in Stackelberg Oligopoly. For the linear (inverse) demand function and cost functions P a b(q 1 + Q 2 ) C 1 (Q 1 ) = c 1 Q 1 C 2 (Q 2 ) = c 2 Q 2, 17
18 the follower sets output according to the Cournot reaction function Q 2 = r 2 (Q 1 )= a c 2 1 2b 2 Q 1. The leader s output is Q 1 = a + c 2 2c 1. 2b 5 Bertrand Oligopoly To further highlight the fact that there is no single model of oligopoly a manager can use in all circumstances and illustrate that oligopoly power does no always imply firms will make positive profits,wewillnextexamine Bertrand oligopoly. The treatment here assumes the firms sell identical products; the case where firms sell differentiated products is presented in the appendix. The next chapter also contains a more detailed analysis of Bertrand oligopoly. An industry is characterized as a Bertrand oligopoly if: 1. There are few firms in the market serving many consumers. 2. The firms produce identical products as a constant marginal cost. 3. Firms engage in price competition and react optimally to prices charged by competitors. 4. Consumers have perfect information and there are no transaction costs. 5. Barriers to entry exist. From the viewpoint of the manager Bertrand oligopoly is undesirable, for it leads to zero profits even if there are only two firms in the market. From the viewpoint of consumers Bertrand oligopoly is desirable, for it leads to precisely the same outcome as a perfectly competitive market. To explain more precisely the preceding assertions, consider a Bertrand duopoly. Because consumers have perfect information, have zero transaction costs. and the products are identical, all consumers will purchase from the firm charging the lowest price. For concreteness, suppose firm 1 charges the monopoly price. By slightly undercutting this price, firm 2 would capture the entire market and make positive profits, while firm 1 would sell nothing. Therefore, firm 1 would retaliate by undercutting firm 2 s lower price, thus recapturing the entire market. 18
19 When would this price war end? When each firm charged a price that equaled marginal cost: P 1 = P 2 = MC. Given the price of the other firm, neither firm would choose to lower its price, for then its price would be below marginal cost and it would make a loss. Also no firm would want to raise it price, for then it would sell nothing. In short, Bertrand oligopoly and homogeneous products lead to a situation where each firm charges marginal cost and economic profits are zero. 6 Concluding Remarks We end this lecture note with the following typology. choice variable is quantity quality move simultaneously Cournot Bertrand move sequentially Stackelberg (Stackelberg  Bertrand??) 7 References See Chapter 13 in Frank. 19
Chapter 9 Basic Oligopoly Models
Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models McGrawHill/Irwin Copyright 2010 by the McGrawHill Companies, Inc. All rights reserved. Overview I. Conditions for Oligopoly?
More informationManagerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models
Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings
More informationOligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.
Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry
More informationOligopoly and Strategic Pricing
R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small
More informationSolution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY
Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 900 (Section ) Chairat Aemkulwat Economics I: Microeconomics Spring 05 Solution to Selected Questions: CHAPTER MONOPOLISTIC
More informationChapter 14. Oligopoly and Monopolistic Competition. Anyone can win unless there happens to be a second entry. George Ade
Chapter 14 Oligopoly and Monopolistic Competition Anyone can win unless there happens to be a second entry. George Ade Chapter 14 Outline 14.1 Market Structures 14.2 Cartels 14.3 Noncooperative Oligopoly
More informationBertrand with complements
Microeconomics, 2 nd Edition David Besanko and Ron Braeutigam Chapter 13: Market Structure and Competition Prepared by Katharine Rockett Dieter Balkenborg Todd Kaplan Miguel Fonseca Bertrand with complements
More informationWeek 7  Game Theory and Industrial Organisation
Week 7  Game Theory and Industrial Organisation The Cournot and Bertrand models are the two basic templates for models of oligopoly; industry structures with a small number of firms. There are a number
More informationPrice competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]
ECON9 (Spring 0) & 350 (Tutorial ) Chapter Monopolistic Competition and Oligopoly (Part ) Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]
More informationThe Simplest Model of Price Competition in a Duopoly: The Bertrand Model. The Symmetric Bertrand Model in a Homogenous Good Market.
OLIGOPOLY. The Simplest Model of Price Competition in a Duopoly: The Bertrand Model. The Symmetric Bertrand Model in a Homogenous Good Market. Two identical firms: 1, 2. Identical product. Constant Returns
More informationMarket Structure: Duopoly and Oligopoly
WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting
More informationC H A P T E R 12. Monopolistic Competition and Oligopoly CHAPTER OUTLINE
C H A P T E R 12 Monopolistic Competition and Oligopoly CHAPTER OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus Collusion: The Prisoners Dilemma 12.5
More informationMikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Mikroekonomia B by Mikolaj Czajkowski Test 12  Oligopoly Name Group MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The market structure in which
More informationOligopoly: Introduction. Oligopoly. Oligopoly Models. Oligopoly: Analysis. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert
Oligopoly: Introduction Oligopoly ECON 370: Microeconomic Theory Summer 00 Rice University Stanley Gilbert Alternative Models of Imperfect Competition Monopoly and monopolistic competition Duopoly  two
More informationINDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK
UNIT EC407, LEVEL 2 INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK Semester 1 1998/99 Lecturer: K. Hinde Room: 427 Northumberland Building Tel: 0191 2273936 email: kevin.hinde@unn.ac.uk Web Page:
More informationNONCOOPERATIVE OLIGOPOLY MODELS
NONCOOPERATIVE OLIGOPOLY MODELS 1. INTRODUCTION AND DEFINITIONS Definition 1 (Oligopoly). Noncooperative oligopoly is a market where a small number of firms act independently but are aware of each other
More informationWeek 3: Monopoly and Duopoly
EC202, University of Warwick, Term 2 1 of 34 Week 3: Monopoly and Duopoly Dr Daniel Sgroi Reading: 1. Osborne Sections 3.1 and 3.2; 2. Snyder & Nicholson, chapters 14 and 15; 3. Sydsæter & Hammond, Essential
More informationChapter 12 Monopolistic Competition and Oligopoly
Chapter Monopolistic Competition and Oligopoly Review Questions. What are the characteristics of a monopolistically competitive market? What happens to the equilibrium price and quantity in such a market
More informationChapter 6. Noncompetitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter
More informationChapter 13a  Oligopoly
Chapter 13a  Oligopoly Goals: 1. Cournot: compete on quantity simultaneously. 2. Bertrand: compete on price simultaneously. 3. Stackelberg: compete on quantity in a sequential setting 4. Hotelling (differentiated
More informationLearning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition
Chapter 7 In Between the Extremes: Imperfect Competition Learning Objectives List the five conditions that must be met for the existence of monopolistic competition. Describe the methods that firms can
More informationUNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition
UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on
More informationOligopoly. What Is Oligopoly? What is Oligopoly?
CHAPTER 13B After studying this chapter you will be able to Oligopoly Define and identify oligopoly Explain two traditional oligopoly models Use game theory to explain how price and output are determined
More informationECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition
ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself
More informationUnit 8. Firm behaviour and market structure: monopolistic competition and oligopoly
Unit 8. Firm behaviour and market structure: monopolistic competition and oligopoly Learning objectives: to understand the interdependency of firms and their tendency to collude or to form a cartel; to
More informationMODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics. Wednesday, December 4, 2013 9:20:15 PM Central Standard Time
MODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics Learning Targets I Can Understand why oligopolists have an incentive to act in ways that reduce their combined profit. Explain why oligopolies
More informationMicroeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy
Microeconomics Claudia Vogel EUV Winter Term 2009/2010 Claudia Vogel (EUV) Microeconomics Winter Term 2009/2010 1 / 25 Lecture Outline Part III Market Structure and Competitive Strategy 12 Monopolistic
More informationLecture 22. Oligopoly & Monopolistic Competition
Lecture 22. Oligopoly & Monopolistic Competition Oligopoly p 1 Clicker Question p 2 Oligopoly An oligopoly is a market with a small number of firms, linked by strategic interaction. Here, we use game theory
More informationLecture 12: Imperfect Competition
Lecture 12: Imperfect Competition Readings: Chapters 14,15 Q: How relevant are the Perfect Competition and Monopoly models to the real world? A: Very few real world business is carried out in industries
More informationUnit 5.4: Monopoly. Michael Malcolm. June 18, 2011
Unit 5.4: Monopoly Michael Malcolm June 18, 2011 1 Price Making A firm has a monopoly if it is the only seller of some good or service with no close substitutes. The key is that this firm has the power
More informationChapter 7 Monopoly, Oligopoly and Strategy
Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are
More informationThe Basics of Game Theory
Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #7 The Basics of Game Theory Friday  November 5, 2004 OUTLINE OF TODAY S RECITATION 1. Game theory definitions:
More informationReview Test Ch 9, 10, 11 2
Review Test Ch 9, 10, 11 2 Student: 1. A onefirm industry is known as: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition. 2. Which of the following is not a basic characteristic
More informationPrepared by Katharine Rockett Dieter Balkenborg Todd Kaplan Miguel Fonseca
Microeconomics, 2 nd Edition David Besanko and Ron Braeutigam Chapter 13: Market Structure and Competition Prepared by Katharine Rockett Dieter Balkenborg Todd Kaplan Miguel Fonseca Market structures differ
More informationRecap from last Session Determination of price and output in the short/long run Non Price Competition
31 : Oligopoly 1 Recap from last Session Determination of price and output in the short/long run Non Price Competition Session Outline Features of Oligopoly Noncollusive models of oligopoly Non price
More informationChapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation
Chapter T he economy that we are studying in this book is still extremely primitive. At the present time, it has only a few productive enterprises, all of which are monopolies. This economy is certainly
More informationNew Technology and Profits
Another useful comparative statics exercise is to determine how much a firm would pay to reduce its marginal costs to that of its competitor. This will simply be the difference between its profits with
More information1 of 21 5/1/2014 4:31 PM
1 of 21 5/1/2014 4:31 PM Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is below $5. $10. $15. $20. A firm should shut down only
More informationCHAPTER 6 MARKET STRUCTURE
CHAPTER 6 MARKET STRUCTURE CHAPTER SUMMARY This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit
More information1. Suppose demand for a monopolist s product is given by P = 300 6Q
Solution for June, Micro Part A Each of the following questions is worth 5 marks. 1. Suppose demand for a monopolist s product is given by P = 300 6Q while the monopolist s marginal cost is given by MC
More information12 Monopolistic Competition and Oligopoly
12 Monopolistic Competition and Oligopoly Read Pindyck and Rubinfeld (2012), Chapter 12 09/04/2015 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition
More informationEconomics 203: Intermediate Microeconomics I Lab Exercise #11. Buy Building Lease F1 = 500 F1 = 750 Firm 2 F2 = 500 F2 = 400
Page 1 March 19, 2012 Section 1: Test Your Understanding Economics 203: Intermediate Microeconomics I Lab Exercise #11 The following payoff matrix represents the longrun payoffs for two duopolists faced
More informationOLIGOPOLY THEORY. 1. Cournot Oligopoly
OLIGOPOLY THEORY 1. Cournot Oligopoly Here we are considering a generalized version of a simple example of the linear Cournot oligopoly in the market for some homogeneous good. We will suppose that there
More informationChapter 4 : Oligopoly.
Chapter 4 : Oligopoly. Oligopoly is the term typically used to describe the situation where a few firms dominate a particular market. The defining characteristic of this type of market structure is that
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that
More informationMonopolistic Competition & Oligopoly
Economics Monopolistic Competition & Oligopoly Learning Centre Monopolistic competition is one type of market structure. A firm that operates in this type of structure is known as a monopolistic competitor.
More informationChapter 13 Oligopoly 1
Chapter 13 Oligopoly 1 4. Oligopoly A market structure with a small number of firms (usually big) Oligopolists know each other: Strategic interaction: actions of one firm will trigger reactions of others
More informationUnit 5.3: Perfect Competition
Unit 5.3: Perfect Competition Michael Malcolm June 18, 2011 1 Market Structures Economists usually talk about four market structures. From most competitive to least competitive, they are: perfect competition,
More informationTwo More Market Structures 2. Oligopoly 3. Monopolistic Competition 4. The "Broken" Invisible Hand 5. Summing Up: Four Market Structures 14.
Chapter 14 Oligopoly and Monopolistic Competition Chapter Outline 1. Two More Market Structures 2. Oligopoly 3. 4. The "Broken" Invisible Hand 5. Summing Up: Four Market Structures Modified by Key Ideas
More informationA2 Micro Business Economics Diagrams
A2 Micro Business Economics Diagrams Advice on drawing diagrams in the exam The right size for a diagram is ½ of a side of A4 don t make them too small if needed, move onto a new side of paper rather than
More informationProblems on Perfect Competition & Monopoly
Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In longrun equilibrium, every firm in a perfectly
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes
More informationEC508: Microeconomic Theory Midterm 3
EC508: Microeconomic Theory Midterm 3 Instructions: Neatly write your name on the top right hand side of the exam. There are 25 points possible. Your exam solution is due Tuesday Nov 24, 2015 at 5pm. You
More informationChapter 7 Monopoly and Oligopoly
Chapter 7 Monopoly and Oligopoly Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. Assume that in order to sell 10 more units of output
More information2007 Thomson SouthWestern
Monopolistic Competition Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. The Four Types of Market Structure Number of Firms? Many firms
More informationEconomics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic.
Economics II: Micro Fall 009 Exercise session 5 VŠE 1 Review Optimal production: Independent of the level of market concentration, optimal level of production is where MR = MC. Monopoly: Market with a
More informationEcn 221  Unit 10 Monopolistic Competition & Oligopoly
Ecn 221  Unit 10 Monopolistic Competition & Oligopoly An industry characterized by monopolistic competition is similar to the case of perfect competition in that there are many firms, and entry into the
More informationECON 600 Lecture 3: Profit Maximization Π = TR TC
ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something
More informationImperfect Competition
Chapter 13 Imperfect Competition 13.1 Motivation and objectives In Chapters 7 11, we considered the pricing decisions of a single firm in isolation, treating its demand curve as fixed. However, a firm
More informationMarket Structure: Perfect Competition and Monopoly
WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit
More informationLecture 8: Market Structure and Competitive Strategy. Managerial Economics September 11, 2014
Lecture 8: Market Structure and Competitive Strategy Managerial Economics September 11, 2014 Focus of This Lecture Examine optimal price and output decisions of managers operating in environments with
More informationModels of Imperfect Competition
Models of Imperfect Competition Monopolistic Competition Oligopoly Models of Imperfect Competition So far, we have discussed two forms of market competition that are difficult to observe in practice Perfect
More informationOligopoly and Monopolistic Competition
Oligopoly and Monopolistic Competition 1. A monopolistically competitive firm has power to set the price of its product because. A) no; there are no barriers to entry B) some; there are barriers to entry
More informationMicroeconomic Analysis
Microeconomic Analysis Oligopoly and Monopolistic Competition Ch. 13 Perloff Topics Market Structures. Cartels. Noncooperative Oligopoly. Cournot Model. Stackelberg Model. Comparison of Collusive, Cournot,
More informationChapter 13 Perfect Competition
Chapter 13 Perfect Competition 13.1 A Firm's ProfitMaximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small
More information12 MONOPOLY. Chapter. Key Concepts
Chapter 12 MONOPOLY Key Concepts Market Power Monopolies have market power, the ability to affect the market price by changing the total quantity offered for sale. A monopoly is a firm that produces a
More informationNonuniform Pricing Oligopoly Cournot Bertrand. Oligopoly Chapter 27
Oligopoly Chapter 27 Other Kinds of Nonuniform Pricing Twopart tariffs: lumpsum fee + constant price per unit Tiein sales: can buy one product only if you buy another one as well Requirement tiein
More informationKey diagrams for A2 Economics unit 3 business economics & theory of the firm
Key diagrams for A2 Economics unit 3 business economics & theory of the firm Advice on drawing diagrams in the exam The right size for a diagram is about ½ of a side of A4 don t make them too small if
More informationPRINCIPLES OF ECONOMICS PART III: MONOPOLISTIC COMPETITION AND OLIGOPOLY. Theory of Monopolistic Competition
PRINCIPLES OF ECONOMICS MARKET MODEL FROM PERFECT COMPETITION TO MONOPOLY PART III: MONOPOLISTIC COMPETITION AND OLIGOPOLY Theory of Monopolistic Competition A monopolistically competitive industry has
More informationPerfect Competition and Pure Monopoly
In the Name of God Sharif University of Technology Graduate School of Management and Economics Microeconomics (for MBA students) 44111 (139394 1 st term)  Group 2 Dr. S. Farshad Fatemi Perfect Competition
More informationOligopoly. Chapter 10. 10.1 Overview
Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires
More informationOnline Review Copy. AP Micro Chapter 8 Test. Multiple Choice Identify the choice that best completes the statement or answers the question.
AP Micro Chapter 8 Test Multiple Choice Identify the choice that best completes the statement or answers the question. 1. There would be some control over price within rather narrow limits in which market
More informationLesson 8  Pure Competition
Lesson 8  Pure Competition Acknowledgement: BYUIdaho Economics Department Faculty (Principal authors: Rick Hirschi, Ryan Johnson, Allan Walburger and David Barrus) Section 1  Market Structures Market
More informationChapter 6 Competitive Markets
Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a
More informationTwo broad cases are noteworthy: Monopolistic Competition
Monopolistic Competition Until now, we have studied two extreme cases of competition: perfect competition and monopoly. Yet, reality is often in between: often, a firm s residual demand curve is downward
More informationUNIT 6. Pricing under different market structures. Perfect Competition
UNIT 6 ricing under different market structures erfect Competition Market Structure erfect Competition ure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the
More informationCOST OF PRODUCTION & THEORY OF THE FIRM
MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM (C) positive and $0 positive. At zero output, variable costs are zero. 2. Based on the information in the table above, the total cost of
More informationEcon 111 (04) 2nd Midterm A
Econ 111 (04) 2nd Midterm A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following does not occur in perfect competition? A)
More informationCournot Duopoly The Model
Cournot Duopoly The Model two firms, one good Demand Side inverse demand: p p y y M y y Both firms can affect the market price! Supply Side firms, one good identical costs: c y c y Typeset by FoilTEX Cournot
More informationBest Response Function: gives each player's payoffmaximizing strategy as a function of the other players' strategies.
OLIGOPOLY Readings Ch. 15 sections 14, Ch. 16 sections 110 1. A Little Bit of Game Theory Readings: Ch. 15 sections 14 A game consists of (at a minimum) players, strategies, and payoffs. The players
More informationEco 403: Industrial Organization Economics, Fall Dr. AbdelHameed H. Nawar. Oligopoly
Eco 403: Industrial Organization Economics, Fall 2012 Dr. AbdelHameed H. Nawar Oligopoly Isoprofit Curve An isoprofit Curve of a firm,,, is defined to be the set of all possible combinations of each firm
More informationdifficult to detect; barriers to entry are low; market demand conditions are unstable; and antitrust action is vigorous. If we are talking about an
OLIGOPOLY We have thus far observed that a certain portion of our market is characterized as competitive, monopolistically competitive and monopolies. However, we also know that some firms that exist today
More informationChapter 13 Market Structure and Competition
Chapter 13 Market Structure and Competition Solutions to Review Questions 1. Explain why, at a Cournot equilibrium with two firms, neither firm would have any regret about its output choice after it observes
More informationFigure: Computing Monopoly Profit
Name: Date: 1. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restrictedinput monopolies. D) sunkcost monopolies. Use the following to answer
More informationChapter 16 Monopolistic Competition and Oligopoly
Chapter 16 Monopolistic Competition and Oligopoly Market Structure Market structure refers to the physical characteristics of the market within which firms interact It is determined by the number of firms
More informationChapter 16 Monopolistic Competition and Product Differentiation
Goldwasser AP Microeconomics Chapter 16 Monopolistic Competition and Product Differentiation BEFORE YOU READ THE CHAPTER Summary This chapter develops the model of monopolistic competition. It also discusses
More informationPrinciples of Microeconomics Review D22D29 Xingze Wang, Ying Hsuan Lin, and Frederick Jao (2007)
Principles of Microeconomics Review DD Xingze Wang, Ying Hsuan Lin, and Frederick Jao (). Principles of Microeconomics, Fall ChiaHui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift
More informationPrice Competition Under Product Differentiation
Competition Under Product Differentiation Chapter 10: Competition 1 Introduction In a wide variety of markets firms compete in prices Internet access Restaurants Consultants Financial services Without
More informationChapter 11 Pricing Strategies for Firms with Market Power
Managerial Economics & Business Strategy Chapter 11 Pricing Strategies for Firms with Market Power McGrawHill/Irwin Copyright 2010 by the McGrawHill Companies, Inc. All rights reserved. Overview I. Basic
More informationMarket Structure. Market Structure and Behaviour. Perfect competition. PC firm output
Market Structure Market Structure and Behaviour See chapters 1012 in Mansfield et al Market: firms and individuals buy and sell Important social and legal preconditions Different structures depending
More informationOligopoly. Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly. Interdependence.
Oligopoly Chapter 162 Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly An oligopoly is a market structure characterized by: Few firms Either standardized or
More informationELEMENTS OF ECONOMICS (3 RD EDITION) BOOK III Compiled by J. Linn
ELEMENTS OF ECONOMICS (3 RD EDITION) BOOK III Compiled by J. Linn 164 Explicit costs are those that require a monetary payment. 165 Implicit costs are those that do not require a monetary payment. 166
More information4. Market Structures. Learning Objectives 463. Market Structures
1. Supply and Demand: Introduction 3 2. Supply and Demand: Consumer Demand 33 3. Supply and Demand: Company Analysis 43 4. Market Structures 63 5. Key Formulas 81 2014 Allen Resources, Inc. All rights
More informationUNIVERSITY OF CALICUT SCHOOL OF DISTANCE EDUCATION
UNIVERSITY OF CALICUT SCHOOL OF DISTANCE EDUCATION III SEMESTER B.A ECONOMICS (2013 ADMISSION) CORE COURSE QUESTION BANK 1. Which market model has the least number of firms? a) monopolistic competition
More informationPractice Questions Week 8 Day 1
Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants
More informationTable of Contents MICRO ECONOMICS
economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...
More informationPerfect Competition PP. Multiple Choice Identify the choice that best completes the statement or answers the question.
Perfect Competition PP Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal revenue received by a firm in a perfectly competitive market: a. is
More informationExam No. 3 Date: 7 or 9 May Instructor: Brian B. Young
Economics 212 Microeconomic Principles Exam No. 3 Date: 7 or 9 May 2012 Name The value of this exam is 100 points Instructor: Brian B. Young Please show your work where appropriate! Multiple Choice 2 points
More information9.1 Cournot and Bertrand Models with Homogeneous Products
1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,
More informationPreTest Chapter 22 ed17
PreTest Chapter 22 ed17 Multiple Choice Questions 1. Refer to the above diagram. At the profitmaximizing level of output, total revenue will be: A. NM times 0M. B. 0AJE. C. 0EGC. D. 0EHB. 2. For a pure
More information