ECO Chapter 9 Instructor: Lanlan Chu. Chapter 9 Basic Oligopoly Models

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "ECO Chapter 9 Instructor: Lanlan Chu. Chapter 9 Basic Oligopoly Models"

Transcription

1 Cournot Model Chapter 9 Basic Oligopoly Models A. Given a linear (inverse) demand function: P = a b(q 1 + Q 2 ) B. Cost functions: C 1 (Q 1 ) = c 1 Q 1 and C 2 (Q 2 ) = c 2 Q 2, C. So Marginal cost functions: MC 1 (Q 1 ) = c 1 and MC 2 (Q 2 ) = c 2 Derive their reaction functions: Derive Cournot Equilibrium: a situation in which neither firm has an incentive to change its output given the other firm s output EX1: Suppose the inverse demand function in a Cournot duopoly is given by P = 10 (Q 1 + Q 2 ) and their marginal costs are 2. a. What are the reaction functions for the two firms? b. What are the Cournot equilibrium outputs? c. What is the equilibrium price? d. What is the equilibrium profit for each firm? Cournot Oligopoly: Collusion EX2: Suppose the inverse demand function in a Cournot duopoly is given by P = 10 (Q 1 + Q 2 ) and their marginal costs are 2. Suppose they decide to collude, then a. What are the equilibrium outputs of each firm? b. What is the equilibrium price? c. What is the equilibrium profits for each firm? d. Compared to the profit in example1, which profit is higher?

2 Stackelberg Oligopoly Given a linear (inverse) demand function P = a b(q 1 + Q 2 ) and marginal cost functions are MC 1 (Q 1 ) = c 1 and MC 2 (Q 2 ) = c 2. Then, The follower sets output according to the reaction function Q 2 = r 2 (Q 1 ) = a c 2 1 Q 2b 2 1 and The leader s output is Q 1 = a+c 2 2c 1 2b EX3: Suppose the inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is given by P = 50 (Q 1 + Q 2 ) and their marginal costs are: MC 1 (Q 1 ) = MC 2 (Q 2 ) = 2 Firm 1 is the leader, and firm 2 is the follower. What is firm 2 s reaction function? What is firm 1 s output? What is firm 2 s output? What is the market price? Betrand Oligopoly EX4: Consider a Bertrand oligopoly consisting of four firms that produce an identical product at a marginal cost of $100.The inverse market demand for this product is P = 500-2Q. a. Determine the equilibrium market price. b. Determine the equilibrium level of output in the market. c. Determine the profits of each firm.

3 EX5: The table below compares and contrasts the output levels and profits for the Cournot, Stackelberg, Bertrand and Collusion models. Fill in the table assuming that there are two firms in the market, the market demand is given by Q=150-1/10 P, each firm has a marginal cost of $20, an average variable cost of 20, and fixed costs of zero. a. Cournot Firm One's Output Firm Two's Output b.stackelberg (leader) (follower) c. Bertrand d. Collusion Total Output Market Price Firm One's Profit Firm Two's Profit Answer: a. Cournot P= (q1+q2) For Firm one we have: MR1= q1-10q2 MC=20 MR1 =MC => q1-10q2=20 Solving for q1 we get the Firm One s best response function: q1=74- ½ q2 (1) Similarly, for Firm 2 we have that: R2=1500q2-10q2 2-10q1q2 MR 2 = q 2-10q 1 MC=20 MR 2 =MC => q 2-10q 1 =20 Solving for q2 we get the Firm Two s best response function: q2=74- ½ q1 (2) The equilibrium is the intersection of the two best response function, substituting (2) into (1) we get: q1=74- ½ (74- ½ q1) Solving for q1 we get q1= Substituting this into (2) we get q2= and Q= q1+q2=98.66 Substituting Q into the inverse demand equation we get P= (98.66) => P= With these values, the profits for both firms are $24,338

4 b. Stackelberg From the previous question Firm Two s best response function is given by: q2=74- ½ q1 Substituting this into the inverse demand function, we get: c. Bertrand d. Collusion P= q1-10(74- ½ q1) which simplifies to: P=760-5q1 Thus, we have that the marginal revenue of the leader is: M R1= q1 MC1=20 From MR1= MC1 => q1=20 => q1=74 Substituting this into the best response function of the follower, we get: q2=37 and Q= q1+q2=111 Substituting Q into the inverse demand equation we get P= (111) => P=390 With these values, the profits for leader firm are $27,380 and the profits for the follower firm are $13,690. Firm set P=MC => P=20 => Q=20 =>Q=148 The firms split the total output in half => q1=q2=74 and both firms earn zero economic profits. When firms collude, they act as a multi-plant monopoly. Because both firms have the same marginal cost, we can solve the problem for the regular monopolist and split the total output in half. P= Q For the monopolist we have: MR= Q MC=20 MR =MC => Q=20 Solving for Q we get the monopolist output: Q=74 => q1=q2=37 Substituting Q into the inverse demand equation we get P= (74) => P=760 The profits for both firms are $27,380 4

5 EX6. Consider a market consisting of two firms where the inverse demand curve is given by P = 500-2Q1-2Q2. Each firm has a marginal cost of $50. Based on this information, we can conclude that equilibrium price in the different oligopoly models will follow which of the following orderings? A. P Bertrand < P Stackelberg < P Cournot < P Collusion B. P Stackelberg < P Collusion < P Cournot < P Bertrand C. P Collusion < P Cournot < P Stackelberg < P Bertrand D. P Bertrand < P Cournot < P Stackelberg < P Collusion EX7. Which of the following are quantity-setting oligopoly models? A. Stackelberg. B. Cournot. C. Bertrand. D. Stackelberg and Cournot. EX8. With linear demand and constant marginal cost, a Stackelberg leader's profits are the follower. A. less than B. equal to C. greater than D. either less than or greater than EX9. If firms compete in a Cournot fashion, then each firm views the: A. output of rivals as given. B. prices of rivals as given. C. profits of rivals as given. D. All of the statements associated with this question are correct. EX10. The Bertrand model of oligopoly reveals that: A. capacity constraints are not important in determining market performance. B. perfectly competitive prices can arise in markets with only a few firms. C. changes in marginal cost do not affect prices. D. All of the statements associated with this question are true. EX11. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry? A. $25 B. $20 C. $15 D. None of the answers is correct. 5

6 Summary of Four Market Structures: Perfect Competition Monopolistic Competition Oligopoly Monopoly # of firms Very many many few One Product identical differentiated (but highly substituable) idential or differentiated unique (no close substitutes) Entry/Exit Easy Easy difficult Nearly impossible Profit max rule MR=MC(or P=MC) MR=MC MR=MC MR=MC Short run profit π<, > or =0 π<, >, or =0 π<, > or =0 π<, > or =0 Long run profit π=0 π=0 π> or =0 π> or =0 Price(P) Quantity(Q) P pc <P mc <P o < Pm Q pc >Q mc >Q o >Q m 6

Chapter 9 Basic Oligopoly Models

Chapter 9 Basic Oligopoly Models Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Conditions for Oligopoly?

More information

Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial 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 information

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Oligopoly: 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 information

Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

Price 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 information

Microeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy

Microeconomics. 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 information

Mikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Mikroekonomia 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 information

Week 7 - Game Theory and Industrial Organisation

Week 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 information

Economics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic.

Economics 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 information

Market Structure: Duopoly and Oligopoly

Market 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 information

12 Monopolistic Competition and Oligopoly

12 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 information

Models of Imperfect Competition

Models 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 information

ECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition

ECON 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 information

Chapter 13 Oligopoly 1

Chapter 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 re-actions of others

More information

Chapter 12 Monopolistic Competition and Oligopoly

Chapter 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 information

Cooleconomics.com Monopolistic Competition and Oligopoly. Contents:

Cooleconomics.com Monopolistic Competition and Oligopoly. Contents: Cooleconomics.com Monopolistic Competition and Oligopoly Contents: Monopolistic Competition Attributes Short Run performance Long run performance Excess capacity Importance of Advertising Socialist Critique

More information

Chapter 13 Market Structure and Competition

Chapter 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 information

MODULE 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. 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 information

All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

All these models were characterized by constant returns to scale technologies and perfectly competitive markets. Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

More information

ECON101 STUDY GUIDE 7 CHAPTER 14

ECON101 STUDY GUIDE 7 CHAPTER 14 ECON101 STUDY GUIDE 7 CHAPTER 14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An oligopoly firm is similar to a monopolistically competitive

More information

Oligopoly: Cournot/Bertrand/Stackelberg

Oligopoly: Cournot/Bertrand/Stackelberg Outline Alternative Market Models Wirtschaftswissenschaften Humboldt Universität zu Berlin March 5, 2006 Outline 1 Introduction Introduction Alternative Market Models 2 Game, Reaction Functions, Solution

More information

Chapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation

Chapter 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 information

Microeconomics II. ELTE Faculty of Social Sciences, Department of Economics. week 9 MARKET THEORY AND MARKETING, PART 3

Microeconomics II. ELTE Faculty of Social Sciences, Department of Economics. week 9 MARKET THEORY AND MARKETING, PART 3 MICROECONOMICS II. ELTE Faculty of Social Sciences, Department of Economics Microeconomics II. MARKET THEORY AND MARKETING, PART 3 Author: Supervised by February 2011 Prepared by:, using Jack Hirshleifer,

More information

Common in European countries government runs telephone, water, electric companies.

Common in European countries government runs telephone, water, electric companies. Public ownership Common in European countries government runs telephone, water, electric companies. US: Postal service. Because delivery of mail seems to be natural monopoly. Private ownership incentive

More information

MICROECONOMICS II. "B"

MICROECONOMICS II. B MICROECONOMICS II. "B" Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics, Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department

More information

Do not open this exam until told to do so.

Do not open this exam until told to do so. Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Winter 004 Final (Version ): Intermediate Microeconomics (ECON30) Solutions Final

More information

Lesson 13 Duopoly. c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved Version C

Lesson 13 Duopoly. c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved Version C Lesson 13. Duopoly 1 Lesson 13 Duopoly c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved Version C 1. Introduction In this lesson, we study market structures that lie between perfect

More information

9.1 Cournot and Bertrand Models with Homogeneous Products

9.1 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 information

1 Cournot Oligopoly with n firms

1 Cournot Oligopoly with n firms BEE07, Microeconomics, Dieter Balkenborg Cournot Oligopoly with n firms firmi soutput: q i totaloutput: q=q +q + +q n opponent soutput: q i =q q i =Σ j i q i constantmarginalcostsoffirmi: c i inverse demand

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

More information

Profit maximization in different market structures

Profit maximization in different market structures Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the

More information

Aggressive Advertisement. Normal Advertisement Aggressive Advertisement. Normal Advertisement

Aggressive Advertisement. Normal Advertisement Aggressive Advertisement. Normal Advertisement Professor Scholz Posted: 11/10/2009 Economics 101, Problem Set #9, brief answers Due: 11/17/2009 Oligopoly and Monopolistic Competition Please SHOW your work and, if you have room, do the assignment on

More information

MODULE 62: MONOPOLY & PUBLIC POLICY

MODULE 62: MONOPOLY & PUBLIC POLICY MODULE 62: MONOPOLY & PUBLIC POLICY Schmidty School of Economics 1 LEARNING TARGETS I CAN Ø Compare & Contrast the effect that perfect competition and monopoly has upon society's welfare. Ø Explain how

More information

Oligopoly. Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly. Interdependence.

Oligopoly. Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly. Interdependence. Oligopoly Chapter 16-2 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 information

Figure: Computing Monopoly Profit

Figure: Computing Monopoly Profit Name: Date: 1. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies. Use the following to answer

More information

Chapter 11: Price-Searcher Markets with High Entry Barriers

Chapter 11: Price-Searcher Markets with High Entry Barriers Chapter 11: Price-Searcher Markets with High Entry Barriers I. Why are entry barriers sometimes high? A. Economies of Scale in some markets average total costs fall over the full range of output. Therefore

More information

Chapter 11 Pricing Strategies for Firms with Market Power

Chapter 11 Pricing Strategies for Firms with Market Power Managerial Economics & Business Strategy Chapter 11 Pricing Strategies for Firms with Market Power McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Basic

More information

Industry profit in an oligopoly (sum of all firms profits) < monopoly profit.

Industry profit in an oligopoly (sum of all firms profits) < monopoly profit. Collusion. Industry profit in an oligopoly (sum of all firms profits) < monopoly profit. Price lower and industry output higher than in a monopoly. Firms lose because of non-cooperative behavior : Each

More information

4. Market Structures. Learning Objectives 4-63. Market Structures

4. Market Structures. Learning Objectives 4-63. 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 information

Variable Cost. Marginal Cost. Average Variable Cost 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R

Variable Cost. Marginal Cost. Average Variable Cost 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R Class: Date: ID: A Principles Fall 2013 Midterm 3 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Trevor s Tire Company produced and sold 500 tires. The

More information

Chapter 05 Perfect Competition, Monopoly, and Economic

Chapter 05 Perfect Competition, Monopoly, and Economic Chapter 05 Perfect Competition, Monopoly, and Economic Multiple Choice Questions Use Figure 5.1 to answer questions 1-2: Figure 5.1 1. In Figure 5.1 above, what output would a perfect competitor produce?

More information

Final Exam (Version 1) Answers

Final Exam (Version 1) Answers Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

More information

OLIGOPOLY. Nature of Oligopoly. What Causes Oligopoly?

OLIGOPOLY. Nature of Oligopoly. What Causes Oligopoly? CH 11: OLIGOPOLY 1 OLIGOPOLY When a few big firms dominate the market, the situation is called oligopoly. Any action of one firm will affect the performance of other firms. If one of the firms reduces

More information

Extreme cases. In between cases

Extreme cases. In between cases CHAPTER 16 OLIGOPOLY FOUR TYPES OF MARKET STRUCTURE Extreme cases PERFECTLY COMPETITION Many firms No barriers to entry Identical products MONOPOLY One firm Huge barriers to entry Unique product In between

More information

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

More information

chapter: Oligopoly Krugman/Wells Economics 2009 Worth Publishers 1 of 35

chapter: Oligopoly Krugman/Wells Economics 2009 Worth Publishers 1 of 35 chapter: 15 >> Oligopoly Krugman/Wells Economics 2009 Worth Publishers 1 of 35 WHAT YOU WILL LEARN IN THIS CHAPTER The meaning of oligopoly, and why it occurs Why oligopolists have an incentive to act

More information

Solution to Homework Set 7

Solution to Homework Set 7 Solution to Homework Set 7 Managerial Economics Fall 011 1. An industry consists of five firms with sales of $00 000, $500 000, $400 000, $300 000, and $100 000. a) points) Calculate the Herfindahl-Hirschman

More information

I. Noncooperative Oligopoly

I. Noncooperative Oligopoly I. Noncooperative Oligopoly Oligopoly: interaction among small number of firms Conflict of interest: Each firm maximizes its own profits, but... Firm j s actions affect firm i s profits Example: price

More information

Chapter 7: Market Structures Section 3

Chapter 7: Market Structures Section 3 Chapter 7: Market Structures Section 3 Objectives 1. Describe characteristics and give examples of monopolistic competition. 2. Explain how firms compete without lowering prices. 3. Understand how firms

More information

Curriculum and Contents: Diplom-Program in Business Administration (Year 1 and Year 2)

Curriculum and Contents: Diplom-Program in Business Administration (Year 1 and Year 2) Business School DeAN S OFFICE INTERNATIONAL RELATIONS L 5, 5 68131 Mannheim Germany Phone +49 (0) 6 21 1 81-1474 Fax +49 (0) 6 21 1 81-1471 international@bwl.uni-mannheim.de www.bwl.uni-mannheim.de Curriculum

More information

Oligopoly. Unit 4: Imperfect Competition. Unit 4: Imperfect Competition 4-4. Oligopolies FOUR MARKET MODELS

Oligopoly. Unit 4: Imperfect Competition. Unit 4: Imperfect Competition 4-4. Oligopolies FOUR MARKET MODELS 1 Unit 4: Imperfect Competition FOUR MARKET MODELS Perfect Competition Monopolistic Competition Pure Characteristics of Oligopolies: A Few Large Producers (Less than 10) Identical or Differentiated Products

More information

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.)

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates the

More information

5. Suppose demand is perfectly elastic, and the supply of the good in question

5. Suppose demand is perfectly elastic, and the supply of the good in question ECON 1620 Basic Economics Principles 2010 2011 2 nd Semester Mid term test (1) : 40 multiple choice questions Time allowed : 60 minutes 1. When demand is inelastic the price elasticity of demand is (A)

More information

Oligopoly. Oligopoly is a market structure in which the number of sellers is small.

Oligopoly. Oligopoly is a market structure in which the number of sellers is small. Oligopoly Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. Under perfect

More information

When other firms see these potential profits they will enter the industry, causing a downward shift in the demand for a given firm s product.

When other firms see these potential profits they will enter the industry, causing a downward shift in the demand for a given firm s product. Characteristics of Monopolistic Competition large number of firms differentiated products (ie. substitutes) freedom of entry and exit Examples Upholstered furniture: firms; HHI* = 395 Jewelry and Silverware:

More information

R&D cooperation with unit-elastic demand

R&D cooperation with unit-elastic demand R&D cooperation with unit-elastic demand Georg Götz This draft: September 005. Abstract: This paper shows that R&D cooperation leads to the monopoly outcome in terms of price and quantity if demand is

More information

Firms With "Market Power" price maker Alternative Microeconomics Part II, Chapter 13 Market Power Page

Firms With Market Power price maker Alternative Microeconomics Part II, Chapter 13 Market Power Page R. Larry Reynolds Firms With "Market Power" Pure competition results in an optimal allocation or resources given the objective of an economic system to allocate resources to their highest valued uses or

More information

a. Retail market for water and sewerage services Answer: Monopolistic competition, many firms each selling differentiated products.

a. Retail market for water and sewerage services Answer: Monopolistic competition, many firms each selling differentiated products. Chapter 16 1. In which market structure would you place each of the following products: monopoly, oligopoly, monopolistic competition, or perfect competition? Why? a. Retail market for water and sewerage

More information

Exercises for Industrial Organization Master de Economía Industrial 2012-2013. Matilde Pinto Machado

Exercises for Industrial Organization Master de Economía Industrial 2012-2013. Matilde Pinto Machado Exercises for Industrial Organization Master de Economía Industrial 2012-2013 Matilde Pinto Machado September 11, 2012 1 Concentration Measures 1. Imagine two industries A and B with concentration curves

More information

13 MONOPOLISTIC COMPETITION AND OLIGOPOLY. Chapter. Key Concepts

13 MONOPOLISTIC COMPETITION AND OLIGOPOLY. Chapter. Key Concepts Chapter 13 MONOPOLISTIC COMPETITION AND OLIGOPOLY Key Concepts Monopolistic Competition The market structure of most industries lies between the extremes of perfect competition and monopoly. Monopolistic

More information

Oligopoly: Competition among the Few

Oligopoly: Competition among the Few King Fahd University of Petroleum and Minerals College of Industrial Management Department of Finance and Economics ECON 511: Managerial Economics Oligopoly: Competition among the Few 216913 Mohammed Husein

More information

Oligopoly. Chapter 25

Oligopoly. Chapter 25 Chapter 25 Oligopoly We have thus far covered two extreme market structures perfect competition where a large number of small firms produce identical products, and monopoly where a single firm is isolated

More information

Other explanations of the merger paradox. Industrial Economics (EC5020), Spring 2010, Sotiris Georganas, February 22, 2010

Other explanations of the merger paradox. Industrial Economics (EC5020), Spring 2010, Sotiris Georganas, February 22, 2010 Lecture 6 Agenda Introduction Mergers in Cournot Oligopoly Extension 1: number of firms Extension 2: fixed cost Extension 3: asymmetric costs Extension 4: Stackelberg mergers Extension 5: Bertrand competition

More information

Natural Gas market in Spain before market liberalization. Jesús Muñoz San Miguel. Yolanda Hinojosa Bergillos

Natural Gas market in Spain before market liberalization. Jesús Muñoz San Miguel. Yolanda Hinojosa Bergillos ABSTRACT: Natural Gas market in Spain before market liberalization Jesús Muñoz San Miguel Yolanda Hinojosa Bergillos Universidad de Sevilla. Spain In this paper we analyze the natural gas market in Spain

More information

Economics I. Decision-making Firm in Imperfect Competition

Economics I. Decision-making Firm in Imperfect Competition Economics I Decision-making Firm in Imperfect Competition The aim of the first lecture is to explain and analyze the markets in imperfect competition and firm behavior in imperfectly competitive environment.

More information

Marginal cost. Average cost. Marginal revenue 10 20 40

Marginal cost. Average cost. Marginal revenue 10 20 40 Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

More information

chapter: Solution Oligopoly 1. The accompanying table presents market share data for the U.S. breakfast cereal market

chapter: Solution Oligopoly 1. The accompanying table presents market share data for the U.S. breakfast cereal market S209-S220_Krugman2e_PS_Ch15.qxp 9/16/08 9:23 PM Page S-209 Oligopoly chapter: 15 1. The accompanying table presents market share data for the U.S. breakfast cereal market in 2006. Company a. Use the data

More information

First degree price discrimination ECON 171

First degree price discrimination ECON 171 First degree price discrimination Introduction Annual subscriptions generally cost less in total than one-off purchases Buying in bulk usually offers a price discount these are price discrimination reflecting

More information

Chapter 16 Oligopoly. 16.1 What Is Oligopoly? 1) Describe the characteristics of an oligopoly.

Chapter 16 Oligopoly. 16.1 What Is Oligopoly? 1) Describe the characteristics of an oligopoly. Chapter 16 Oligopoly 16.1 What Is Oligopoly? 1) Describe the characteristics of an oligopoly. Answer: There are a small number of firms that act interdependently. They are tempted to form a cartel and

More information

11 PERFECT COMPETITION. Chapter. Competition

11 PERFECT COMPETITION. Chapter. Competition Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

More information

This hand-out gives an overview of the main market structures including perfect competition, monopoly, monopolistic competition, and oligopoly.

This hand-out gives an overview of the main market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. Market Structures This hand-out gives an overview of the main market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. Summary Chart Perfect Competition Monopoly

More information

Oligopoly and Game Theory

Oligopoly and Game Theory Chapter 15 MODERN PRINCIPLES OF ECONOMICS Third Edition Oligopoly and Game Theory Outline Cartels The Prisoner s Dilemma Oligopolies When Are Cartels and Oligopolies Most Successful? Government Policy

More information

Information Exchanges Among Firms and their Impact on Competition*

Information Exchanges Among Firms and their Impact on Competition* Information Exchanges Among Firms and their Impact on Competition* Kai-Uwe Kühn Xavier Vives Institut d'anàlisi Econòmica (CSIC) Barcelona June 1994 Revised December 1994 *We are grateful to Paco Caballero,

More information

Oligopoly and Strategic Behavior

Oligopoly and Strategic Behavior Oligopoly and Strategic Behavior MULTIPLE-CHOICE QUESTIONS Like a pure monopoly, an oligopoly is characterized by: a. free entry and exit in the long run. b. free entry and exit in the short run. c. significant

More information

Economics 431 Fall 2003 1st midterm Answer Key

Economics 431 Fall 2003 1st midterm Answer Key Economics 431 Fall 003 1st midterm Answer Key 1) (7 points) Consider an industry that consists of a large number of identical firms. In the long run competitive equilibrium, a firm s marginal cost must

More information

Mergers and Acquisitions in Mixed-Oligopoly Markets

Mergers and Acquisitions in Mixed-Oligopoly Markets International Journal of Business and Economics, 006, Vol. 5, No., 147-159 Mergers and Acquisitions in Mixed-Oligopoly Markets Germán Coloma * Department of Economics, CEMA University, Argentina Abstract

More information

Market Structure: Oligopoly (Imperfect Competition)

Market Structure: Oligopoly (Imperfect Competition) Market Structure: Oligopoly (Imperfect Competition) I. Characteristics of Imperfectly Competitive Industries A. Monopolistic Competition large number of potential buyers and sellers differentiated product

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

More information

Q13.2 Describe the oligopoly market structure and give some examples.

Q13.2 Describe the oligopoly market structure and give some examples. MONOPOLISTIC COMPETITION AND OLIGOPOLY QUESTIONS & ANSWERS Q13.1 Describe the monopolistically competitive market structure and give some examples. Q13.1 ANSWER Monopolistic competition is a market structure

More information

The New Trade Theory. Monopoly and oligopoly in trade. Luca De Benedictis 1. Topic 3. 1 University of Macerata

The New Trade Theory. Monopoly and oligopoly in trade. Luca De Benedictis 1. Topic 3. 1 University of Macerata The New Trade Theory Monopoly and oligopoly in trade Luca De Benedictis 1 1 University of Macerata Topic 3 A new generation of models Main characteristics and insights: Countries do not trade, rms do.

More information

Northern University Bangladesh

Northern University Bangladesh Northern University Bangladesh Managerial Economics ( MBA 5208) Session # 09 Oligopoly & Monopolistic Competition Prof. Mahmudul Alam (PMA) 23 September, 2011 (Friday) 1 1. Monopolistic Competition & Oligopoly

More information

Product Differentiation In homogeneous goods markets, price competition leads to perfectly competitive outcome, even with two firms Price competition

Product Differentiation In homogeneous goods markets, price competition leads to perfectly competitive outcome, even with two firms Price competition Product Differentiation In homogeneous goods markets, price competition leads to perfectly competitive outcome, even with two firms Price competition with differentiated products Models where differentiation

More information

Eco 340 Industrial Economics Market Structures: Cartels / Cooperative Oligopoly. Prof Dr. Murat Yulek

Eco 340 Industrial Economics Market Structures: Cartels / Cooperative Oligopoly. Prof Dr. Murat Yulek Eco 340 Industrial Economics Market Structures: Cartels / Cooperative Oligopoly Prof Dr. Murat Yulek Oligopolistic Markets and the Cartel Competitive market: firms operate independently In other markets,

More information

Thus MR(Q) = P (Q) Q P (Q 1) (Q 1) < P (Q) Q P (Q) (Q 1) = P (Q), since P (Q 1) > P (Q).

Thus MR(Q) = P (Q) Q P (Q 1) (Q 1) < P (Q) Q P (Q) (Q 1) = P (Q), since P (Q 1) > P (Q). A monopolist s marginal revenue is always less than or equal to the price of the good. Marginal revenue is the amount of revenue the firm receives for each additional unit of output. It is the difference

More information

THE OLIGOPOLY MARKET AND THE R&D EXPENDITURE

THE OLIGOPOLY MARKET AND THE R&D EXPENDITURE Bulletin of the Transilvania University of Braşov Vol. 3 (52) - 2010 Series V: Economic Sciences THE OLIGOPOLY MARKET AND THE R&D EXPENDITURE Constantin DUGULEANĂ 1 Abstract: The firms in the oligopoly

More information

Write down the names of three companies: competition. major competitors.

Write down the names of three companies: competition. major competitors. Write down the names of three companies: 1. Company with very little competition. 2. Company with two to three major competitors. 3. Company with many competitors. Which situation do you think describes

More information

1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized market?

1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized market? Managerial Economics Study Questions With Solutions Monopoly and Price Disrcimination 1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized

More information

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

More information

Course: Economics I. Author: Ing. Martin Pop

Course: Economics I. Author: Ing. Martin Pop Course: Economics I Author: Ing. Martin Pop Contents Introduction 1. Characteristics of imperfect competition. The main causes of imperfect competition 2. Equilibrium firms in imperfect competition 3.

More information

Equilibrium: Illustrations

Equilibrium: Illustrations Draft chapter from An introduction to game theory by Martin J. Osborne. Version: 2002/7/23. Martin.Osborne@utoronto.ca http://www.economics.utoronto.ca/osborne Copyright 1995 2002 by Martin J. Osborne.

More information

Oligopolistic models, because...

Oligopolistic models, because... Overview Network models of spatial oligopoly with an application to deregulation of electricity generation By Benjamin F.Hobbs Operations Research, vol. 34 (3) 1986, 395-409 Heikki Lehtonen 25th February

More information

Econ 201 Lecture 17. The marginal benefit of expanding output by one unit is the market price. Marginal cost of producing corn

Econ 201 Lecture 17. The marginal benefit of expanding output by one unit is the market price. Marginal cost of producing corn Econ 201 Lecture 17 The Perfectly Competitive Firm Is a Taker (Recap) The perfectly competitive firm has no influence over the market price. It can sell as many units as it wishes at that price. Typically,

More information

Gains from trade in a Hotelling model of differentiated duopoly

Gains from trade in a Hotelling model of differentiated duopoly Gains from trade in a Hotelling model of differentiated duopoly Kenji Fujiwara School of Economics, Kwansei Gakuin University and Department of Economics, McGill University August 8, 009 Abstract Constructing

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

Chapter 13: Strategic Decision Making in Oligopoly Markets

Chapter 13: Strategic Decision Making in Oligopoly Markets Learning Objectives After reading Chapter 13 and working the problems for Chapter 13 in the textbook and in this Workbook, you should be able to do the following things For simultaneous decisions: Explain

More information

Monopolistic Competition

Monopolistic Competition Monopolistic Chapter 17 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College

More information

1 Monopoly Why Monopolies Arise? Monopoly is a rm that is the sole seller of a product without close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller

More information

Cournot s model of oligopoly

Cournot s model of oligopoly Cournot s model of oligopoly Single good produced by n firms Cost to firm i of producing q i units: C i (q i ), where C i is nonnegative and increasing If firms total output is Q then market price is P(Q),

More information

LECTURE #15: MICROECONOMICS CHAPTER 17

LECTURE #15: MICROECONOMICS CHAPTER 17 LECTURE #15: MICROECONOMICS CHAPTER 17 I. IMPORTANT DEFINITIONS A. Oligopoly: a market structure with a few sellers offering similar or identical products. B. Game Theory: the study of how people behave

More information

Oligopoly: Firms in Less Competitive Markets

Oligopoly: Firms in Less Competitive Markets Chapter 13 Oligopoly: Firms in Less Competitive Markets Prepared by: Fernando & Yvonn Quijano 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O Brien, 2e. Competing with

More information