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


 Solomon Newman
 2 years ago
 Views:
Transcription
1 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 s output. Firms behave strategically  Game Theory Focus on firm s behaviour  pricing choice or quantity choice Competition model 1: the Cournot theory Competition model 2: Van Stackelberg duopoly theory Competition model 3: the Bertrand Theory
2 Monopolistic Competition Characterized by: The existence of numerous firms each producing a product that is a close, but imperfect substitute for the products of other firms free entry and exit of firms Econ 203 Topic 8 page 2
3 Oligopoly: Econ 203 Topic 8 page 3 In Chapter 12: the situation with a single firm (monopoly). The Monopolist: set price (market power) maintain an economic profit in the long run no entry of new firms Oligopoly: more than one firm in the market each firm has some market power to set price awareness of its competition in decision making process
4 Ther are many theories on how firms behave in an oligopolistic market. Econ 203 Topic 8 page 4 Behaviour will be determined by pricing and quantity choices. Such choices depend on the firms in the market and on how they compete. Main focus of this chapter will be on the duopoly: two firms in the market.
5 page 5 There is no single theory of oligopoly. In contrast to perfect competition or monopoly, where there is a single model, many types of oligopoly models exist. Depending on the circumstances each one of these theories may be appropriate. An oligopoly is a market structure with a limited or small number of firms.
6 An example in Canada, of an oligopoly is the Chartered Banks. Econ 203 Topic 8 page 6 Each of the major firms takes account of the reaction of the others when it determines its price and output policy, since its policy will affect the others. That is, when a firm increases its price, it must anticipate the reaction of other firms in the industry. If its competition decides against a price increase, it is likely that the price increase will have to be rescinded; otherwise, its rival will pull away a large number of its customers.
7 page 7 In some industries, the number of firms tends to be small, because low costs cannot be achieved unless a firm is producing an output equal to a substantial percentage of the total available market: economies of scale. (Each firm must be large relative to the market.)
8 Collusive Agreements Econ 203 Topic 8 page 8 Conditions in oligopolistic industries tend to encourage collusion. This is because: 1) the number of firms is small 2) firms are aware of their interdependence If firms collude they will: 1) achieve greater profits 2) decrease their uncertainty 3) have a stronger ability to prevent entry of new firms
9 page 9 Collusive arrangements are difficult to maintain and control, since the payoff from cheating on the agreement enables the cheating firm to attain even higher profits. Cartel: is a formal collusive arrangement among firms within an industry. What Price Will a Cartel Charge? If a cartel is established to set a uniform price for a particular homogeneous product, the cartel must estimate the marginal cost curve for the cartel as a whole. If we assume that input prices do not increase as the cartel expands, this marginal cost curve is the horizontal sum of the marginal cost curves of the individual firms.
10 Price P 0 A MC (Cartel) Econ 203 Topic 8 page 10 MC=MR Demand MR Q 0 Output In the diagram, suppose the marginal cost curve for the cartel is shown.
11 page 11 If the demand curve for the industry s product and MR curve are as above, the output that maximizes the total profit of the cartel members is Q 0. That is, if the cartel maximizes profits, it will choose a price P 0. This is the monopoly price! The cartel acts as a monopoly. The cartel must distribute the industry s total sales among the firms belonging to the cartel.
12 page 12 It will allocate sales to firms such that the marginal cost of all firms is equal, in order to maximize cartel profits. The cartel could make more money by reallocating output among firms so as to reduce the cost of producing the cartel s total output. But this allocation of output is unlikely, since allocation decisions are the result of negotiation between firms with differing productive abilities. The process of negotiation between firms is very political, and the firms with the greatest influence, are likely to receive the largest sales quotas, even though this raises total cartel costs.
13 The Cournot Model: Econ 203 Topic 8 page 13 An industry in which firms produce identical goods and each firm determines its profitmaximizing output level, taking its rivals current output levels as given. p firms maximize profits firms choose price and quantity assuming that the other firm(s) keeps their quantity fixed. Assume: two firms producing the same good. each duopolist treats the other s quantity of output as fixed.
14 Cournot s Water Example: MC =0 Econ 203 Topic 8 page 14 Let total market demand curve is given: P = a b( Q + Q ) 1 2, where a an b are positive numbers and Q 1 and Q 2 are outputs of the two firms. The profit maximizing problem facing firm 1, given the assumption that firm 2 s output is fixed at the current level: Max Π( Q, Q ) = PQ C ( Q ) Q
15 The demand curve for firm 1 is therefore given by: Econ 203 Topic 8 page 15 P1 = ( a bq2) bq1. (Q 2 is assumed to be fixed.) We get the demand curve for firm 1 by subtracting bq 2 from the vertical intercept of the market demand curve. The idea is that firm 2 has already supplied the Q 2 units of market demand, leaving firm 1 the rest to work with.
16 page 16 Firm 1 s demand curve lies to the right of this new vertical axis. Often referred to as a residual demand curve. The firm s MR curve is labelled MR 1.
17 page 17 Since the profit maximizing level of output for firm 1 is found where MR 1 =MC and MC=0 in this case, they should supply at a point where MR 1 =0. P = ( a bq ) bq price ( ) ) TR = PQ = a bq bq Q 2 TR = ( aq bq Q bq ) MR TR = = a bq 2bQ Q MR has twice the slope as demand so it intersects MC=0 at the half way point between Q 1 =0 on the horizontal intercept of the demand curve.
18 page 18 By symmetry, Q 2 =Q 1. Set MR = MC and solve for the output of firm 1 in terms of the output of firm 2. TR MR1 = = a bq2 2bQ1 = MC = 0 Q a bq 2bQ = 0 Q Q a bq 2bQ = 0 a = Q = 2 1 3bQ a = = 3b Q 1 2
19 MR Q 1 1 = TR = = a bq2 2bQ1 = MC = 0 Q a 1 bq 2b 2 Econ 203 Topic 8 page 19 Reaction Function: a curve that tells the profitmaximizing level of output for one oligopolist for each amount to supplied by another. For the example where MC=0, the reaction function for firm 1 is : Q 1 = a bq 2b 2.
20 The function tells how firm 1 s quantity will react to the quantity level offered by firm 2. Econ 203 Topic 8 page 20 Since the Cournot duopoly problem is completely symmetric, firm 2 s reaction function has the same structure: Q 2 = a bq 2b 1.
21 page 21 The two reaction functions are illustrated above. There is a stable equilibrium at the intersection of the two reaction functions.
22 Here, both firms are producing 3 firm has any incentive to change. a b Econ 203 Topic 8 page 22 units of output, and neither Profit? Combined output Q=Q1+Q2= a a a 3 b + 3 b =2 3 b. Market price will be P = a b( Q + Q ) 1 2 a a a a a P = a b a = b = = Total revenue will equal: TR PQ a a 2 a = = =. 3 3b 9b.
23 page 23 With production cost being assumed to be zero, profit equals TR. Example: A duopolist faces a market demand curve given by P = 56 2 Q. Each firm can produce output at a constant MC of $20 per unit. Graph their reaction functions and find the equilibrium price and quantity. For firm 1: P = 56 2Q = 56 2( Q + Q ) P = ( 56 2Q ) 2Q Produce an output where: MR=MC
24 ( 56 2 ) 2 ) TR = PQ = Q Q Q TR = 56Q 2Q Q 2Q MR = 56 2Q 4Q Econ 203 Topic 8 page 24 MC = 20 MR = 56 2Q 4Q MC = MR 20 = 56 2Q 4Q 4Q = 36 2Q Q Q = = 36 2Q Q = Q = Q 2 1 reaction function reaction function
25 page 25 Since each firm will produce the same amount at the point where the reaction functions intersect, substitute into the expression for Q 2 : Q1 = Q2 reaction function Q2 = Q1 reaction function equate: Q = Q ( Q ) = Q Q1 = Q1 45. = 075. Q1 45. Q1 = = Q1 = Q2 = 6 Q = 6+ 6 = 12 units 1 1 Price is: P=562Q=562(12)=$32/unit.
26 page 26
27 page 27 The Bertrand Duopoly Model: An industry in which two firms produce identical goods and each firm chooses its price assuming that its rival s price will remain fixed. p.401 According to the model, from the buyer s perspective, what really counts is how the prices charged by the two firms compare. Buyers would want to purchase the good from the firm with the lowest price. Bertrand argued that each firm would choose a price on the assumption that its rival s price would remain fixed.
28 page 28 Illustration: If the market demand and cost conditions are same as in the Cournot example, firm 1 could charge an initial price of denoted P 1 0. Firm 2 can either: (1) charge more than firm 1, (sell nothing in the market) (2) split the market demand equally at that price, or (3) sell at a marginally lower price than firm 1 (capture the entire market demand). Option 3 is the most profitable. However, each firm would desire this strategy and would undercut the other until price reaches marginal cost. With each firm charging a price equal to MC, it is assumed the duopolists will share the market equally.
29 page 29 Example: Bertrand duoplists face a market demand curve given by P= 56 2Q. Each can produce output at a constant marginal cost of $20 / unit. Find the equilibrium price and quantity. Both firm s price at marginal cost: P=MC = 20 Industry output is determined by market demand: 20=562Q Q=18. If the firms split the market equally, then each firm produces half of industry output: Q 1 =Q 2 =9 units.
30 page 30 The Stackelberg Model: An industry in which one firm (the Stackelberg leader) sets its profitmaximizing level of output first, knowing that its rival (the Stackelberg follower) will behave as a Cournot duopolist. p. 402 In the Stackelberg model, a firm would want to choose its output level by taking into account the effect that choice would have on the output level of its rival. Suppose firm 1 knows that firm 2 will treat firm 1 s output as fixed. Can this knowledge be used to the advantage of firm 1?
31 Since firm 2 s reaction function is given by Econ 203 Topic 8 page 31 Q 2 = a bq 2b 1 reaction function. Knowing that firm 2 s output will depend on Q 1 in this manner, firm 1 can then substitute the reaction function for Q 2 into the equation for the market demand curve: P a b Q Q a b Q a bq a bq = + = ( 1 2) 1 = 2b 2. This demand curve and MR curve are shown in figure 13.4.
32 page 32
33 page 33 With MC assumed to be zero in this example, firm 1 s profit maximizing output level will be the one for MR 1 is zero, at Q * 1 = a 2b. Firm 2 will produce: Q 2 ab Price: * =. 4 P a b Q Q a b a * * a = ( + = + 1 2) 2b 4b a a 4a 2a a a P = a = =
34 page 34 Example: A Stackelberg leader (firm 1) and follower (firm 2) face a market demand curve given by P=562Q. Each can produce output as a constant marginal cost of $20/unit. Find the equilibrium price and quantity. By substituting firm 2 s reaction function: Q = Q reaction function 2 1 into the demand facing firm 1: P = ( 56 2Q ) 2Q P = ( 56 2( Q ) 2Q P = Q 2Q P = 38 Q 1 1
35 To derive MR: TR = PQ = ( 38 Q ) Q TR = 38Q Q Econ 203 Topic 8 page 35 MR = 38 2Q. 1 1 Setting MR=MC, determines firm 1 s output: MR1 = 38 2Q1 MC = = 38 2Q1 2Q = = 18 Q 1 1 = 18 / 2 = 9 units Inserting Q 1 s output of 9 units into the reaction function for firm 2 yields the output for firm 2:
36 Q = Q reaction function Q = 9 05.( 9) = = 45. units Econ 203 Topic 8 page 36 Total industry output is =13.5 units. Price is: P=562Q = 562(13.5) =5627 = $29 unit. Firm 1 is referred to as a Stackelberg leader. Firm 2 is the Stackelberg follower.
37 page 37 The best output choice is a/2b for firm 1 once it takes into account that firm 2 will respond to its choice according to the reaction function for firm 2. Once firm 1 produces a/2b, firm 2 will consult its reaction function and product a/4b.
38 page 38 If firm 1 believes that firm 2 will fix the amount produced at a/4b, it should consult its own reaction function and produce the corresponding quantity 3a/8b. Firm 1 would earn more. However, firm 1 knows that if it cuts back, this will elicit a reaction from firm2. The best option is for firm 1 to remain at a/2b. Firm 1 earns more profit than at the intersection of the reaction curves, but does not give firm 2 any incentive to increase output.
39 page 39
40 page 40 Stackelberg s model is viewed as a superior model to compared to the other two models since it allowed one firm to act strategically. However, there is nothing stopping the rival firm to behave in the same way. For consumers this would be desirable with a large output and low price result! For owners of the firms, this strategic behaviour leads to the worst possible outcome.
41 Game Theory Econ 203 Topic 8 page 41 Managers who must analyse and participate in oligopolistic decision making, are very likely to use modern game theory. Since a basic feature of oligopoly is that each firm must take account of its rivals reactions to its own decision making, oligopolistic decision making has many of the characteristics of a game. Game theory attempts to study decision making where, like an oligopoly, there is a mixture of conflict and cooperation.
42 page 42 A game is a competitive situation in which two more opponents pursue their own interests, and no one can dictate the outcome. Each player of the game is a decision making entity with a certain amount of allocated resources. The rules of the game describe how resources can be used. A strategy specifies what a player will do under each situation while playing the game. These are the actions that will be taken in response to a particular action taken by another player, or actions that reflect where the player wants to end up.
43 page 43 A player s payoff varies from game to game. For twoplayer games, the possible outcomes are illustrated with the aid of a payoff matrix. Possible Strategies 3 A s profit: $30 B s profit: $40 for Firm A 4 A s profit: $40 B s profit: $30 Possible Strategies for Firm B 1 2 A s profit: $20 B s profit: $30 A s profit: $30 B s profit: $20 Firm A can choose strategy 3 or 4 and Firm B can choose strategy 1 or 2.
44 The payoff, expressed in terms of profits for each firm, is shown above for each combination of strategies. Econ 203 Topic 8 page 44 In this game, there is a dominant strategy for each player. Regardless of whether Firm B chooses strategy 1 or 2, Firm A will make more profit if it chooses strategy 4 rather than 3. Strategy 4 is Firm A s dominant strategy. Similarly, regardless of whether Firm A adopts strategy 3 or 4, firm B will make more profit if it chooses strategy 1 rather than 2. Hence, strategy 1 is Firm B s dominant strategy. The solution to this game is that Firm A chooses strategy 4 and Firm B chooses strategy 1.
45 Nash Equilibrium Econ 203 Topic 8 page 45 Not all games have a dominant strategy for every player. Possible Strategies 3 A s profit: $30 B s profit: $40 for Firm A 4 A s profit: $40 B s profit: $30 Possible Strategies for Firm B 1 2 A s profit: $20 B s profit: $30 A s profit: $30 B s profit: $40 Suppose the pay off matrix for Firms A and B are as shown. Under these circumstances, Firm A still has a dominant strategy: 4. Regardless of which strategy firm B adopts, strategy 4 is firm A s best strategy.
46 page 46 But firm B no longer has a dominant strategy. Its optimal strategy depends on what firm A decides to do. If Firm A chooses strategy 3, firm B will make more profit if it chooses strategy 1 rather than strategy 2. If Firm A adopts strategy 4, Firm B will make more profit if it chooses strategy 2 rather than strategy 1. To determine what action should be taken, Firm B must try to anticipate what action Firm A will take. That is, Firm B must try to figure out what the best action it would take if it was Firm A.
47 page 47 Since we know from the table that Firm A s dominant strategy is strategy 4, Firm B can surmise that this strategy will occur. Firm A will most likely choose strategy 4, and hence, Firm B will choose strategy 2 because it is more profitable than strategy 1 if Firm A adopts strategy 4. Thus, Firm A is expected to adopt Strategy 4 and Firm B is expected to adopt strategy 2. This is the Nash equilibrium for this game.
48 page 48 A Nash equilibrium is a set of strategies such that each player believes that it is doing the best it can given the strategy of the other player. Neither player regrets its own decision or has any incentive to change it. If each player has a dominant strategy, this strategy is its best choice regardless of what other players do. This is a Nash equilibrium too. The next table is an example of a payoff matrix for a game with two Nash equilibria.
49 page 49 Possible Strategies 3 A s profit: $50 B s profit: $50 for Firm A 4 A s profit: $0 B s profit: $0 Possible Strategies for Firm B 1 2 A s profit: $0 B s profit: $0 A s profit: $50 B s profit: $50 If Firm A adopts strategy 3 and Firm B adopts strategy 1, each is doing the best it can given the other s choice of strategy. If Firm A adopts strategy 4 and B adopts strategy 2, each is doing the best it can given the other s choice of strategy. Hence, there are two Nash equilibria in this game.
50 Monopolistic Competition Econ 203 Topic 8 page 50 With monopolistic competition all firms sell a somewhat different product. Product differentiation is the primary defining difference with this market structure compared to perfect competition. With perfect competition, the product produced by all firms in the industry is identical. With monopolistic competition, each product within the industry is just a bit different.
51 page 51 Such differences can be in the product s physical makeup (Coke versus Pepsi), or in the amount of service each firm offers (Payless shoes versus Footlocker). Because of these differences, producers have a certain amount of control over the price of their product, although it is usually small because the products of other firms are very similar to their own. In addition to product differentiation, there are four other conditions that must be met for an industry to be considered to be part of the market structure known as monopolistic competition:
52 page 52 1) There must be a large number of firms in the industry. The good must be produced by at least 50 to 100 firms, with each firm s product a close substitute for the products of the other firms in the industry. 2) The number of firms in the industry must be large enough that each firm expects its actions to be of no real concern or ignored by its rivals, and it is not concerned with possible retaliatory moves by its rivals. With a large number of firms within the industry, this is usually met. The actions of the firm are not driven explicitly by the possible responses of its competitor.
53 page 53 3) There must be easy entry into the industry. No legal barriers. 4) There must be no collusion, such as price fixing or market sharing among firms in the industry.
54 Price and Output Decisions Under Monopolistic Competition Econ 203 Topic 8 page 54 Because each firm produces a slightly different product, the demand curve facing each firm slopes downward to the right. If the firm raises its price, the quantity demanded for its product will go down, but will no completely disappear. It will still retain some of its customers and not lose all of its customers to other firms. Conversely, if the firm decides to lower its price, it will gain some customers, but not all of its competitors customers. (Product loyality.)
55 page 55 Price profit MC P 0 C AC A B MC=MR Demand (d 0 ) MR q 0 Output Firm (ShortRun)
56 The diagram illustrates the short run equilibrium of a monopolistically competitive firm. Econ 203 Topic 8 page 56 The firm will set its price at P 0 and output rate at q 0, due to the fact that it will maximize its profits where MC=MR. Profit will be earned because P 0 is higher than average total cost at this output of q 0. (P 0 >A) Profit = AP 0 CB
57 Price MC Econ 203 Topic 8 page 57 P 0 LAC P 1 MR 1 Demand (d 1 ) MC=MR q 1 Output The next diagram illustrates the long run equilibrium. Profits are temporary since there are no barriers to entry. Other firms can enter and sell similar products.
58 page 58 As firms enter the industry, the firm s demand function shifts inward. In the long run, each firm must be making no profit and maximizing its profits. The zero profit condition is met at the combination of price=p 1 and output=q 1, since the firm s average cost at this output equals price P 1. Profit maximization is met, since MC=MC at this output rate.
59 page 59 In monopolistically competitive industries, profits are competed away with entry of new firms, just like they are in competitive industries. Unlike competitive industries, each monopolistically competitive firm is a price maker, and therefore price exceeds marginal cost. Marginal cost equals price in a competitive industry. Under monopolistic competition each firm produces a smaller quantity than a competitive firm. Long run average cost is higher than minimum average cost.
60 page 60 But, consumers benefit from the variety of products and the ability of the industry to cater to particular demands of some consumers.
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 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 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 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 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 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 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 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 informationUniversity of Hong Kong ECON6021 Microeconomic Analysis Oligopoly
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
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 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 informationECON101 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 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 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 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 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 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 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 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 informationchapter: 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 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 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 is a market structure more susceptible to gametheoretic analysis, because of apparent strategic interdependence among a few producers.
1 Market structure from a gametheoretic perspective: Oligopoly After our more theoretical analysis of different zerosum and variablesum games, let us return to the more familiar territory of economicsespecially
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 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 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 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 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 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 13 GAME THEORY AND COMPETITIVE STRATEGY
CHAPTER 13 GAME THEORY AND COMPETITIVE STRATEGY EXERCISES 3. Two computer firms, A and B, are planning to market network systems for office information management. Each firm can develop either a fast,
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 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 informationOligopoly: Duopoly : understanding Vodaphone and Digicel interactions
Oligopoly: Duopoly : understanding Vodaphone and Digicel interactions You have looked at the two extreme models of the market economy perfect competition at one end, and monopoly at the other. In the
More informationOligopoly. Unit 4: Imperfect Competition. Unit 4: Imperfect Competition 44. 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 informationExtreme 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 informationChapter 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 informationCooleconomics.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 informationWhen 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 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 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 information(Perfect) Competition
(Perfect) Competition (Perfect) Competition The model of perfect competition is based on the following assumptions: (Perfect) Competition The model of perfect competition is based on the following assumptions:
More information5. 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 information13 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 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 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 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 informationPreTest Chapter 23 ed17
PreTest Chapter 23 ed17 Multiple Choice Questions 1. The kinkeddemand curve model of oligopoly: A. assumes a firm's rivals will ignore a price cut but match a price increase. B. embodies the possibility
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 informationOLIGOPOLY. 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 informationMULTIPLE 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 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 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 informationCHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition
CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates
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 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 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 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 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 informationChapter 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 informationCHAPTER 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 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 informationAll 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 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 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 informationDescribe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly
www.edupristine.com Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly Prerequisite Characteristics of different market
More informationFirms in Perfectly Competitive Markets
Chapter 11 Firms in Perfectly Competitive Markets Chapter Outline 11.1 LEARNING OBJECTIVE 11.1 Perfectly Competitive Markets Learning Objective 1 Define a perfectly competitive market, and explain why
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 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 informationPricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young
Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and
More informationMONOPOLISTIC COMPETITION AND OLIGOPOLY
MONOPOLISTIC COMPETITION AND OLIGOPOLY I. MONOPOLISTIC COMPETITION a. CHARACTERISTICS i. RELATIVELY LARGE NUMBER OF SELLERS 1. Each firm has a relatively small percentage of market share 2. No collusion
More informationOligopoly. 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 informationQuick Review. Chapter 15: Figure 1 The Four Types of Market Structure
Chapter 16: Oligopoly Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly and do not face so much competition that they are price takers. Types
More information8.1 Perfect Competition
8.1 Perfect Competition Chapter 8 Competitive Firms and Markets Market structure provides information about how firms operating in the market will behave; it is a function of: the number of firms in the
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 informationAggressive 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 informationEXERCISE 24 SWEEZY AND CARTEL OLIGOPOLY
Sweezy and artel Oligopoly 1 EXERISE 24 SWEEZY ND RTEL OLIGOPOLY The Sweezy model, or the kinked demand model, shows that price stability can exist without collusion in an oligopoly. Two firms "squabble"
More informationDo 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 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 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 informationEconomics 165 Winter 2002 Problem Set #2
Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs
More informationCHAPTER 11: MONOPOLISTIC COMPETITION AND OLIGOPOLY
CHAPTER 11: MONOPOLISTIC COMPETITION AND OLIGOPOLY Introduction While perfect competition and monopoly represent the extremes of market structures, most American firms are found in the two market structures
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 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 informationUNIVERSITY OF CALICUT MICRO ECONOMICS  II
UNIVERSITY OF CALICUT SCHOOL OF DISTANCE EDUCATION BA ECONOMICS III SEMESTER CORE COURSE (2011 Admission onwards) MICRO ECONOMICS  II QUESTION BANK 1. Which of the following industry is most closely approximates
More informationMonopolistic Competition, Oligopoly, and maybe some Game Theory
Monopolistic Competition, Oligopoly, and maybe some Game Theory Now that we have considered the extremes in market structure in the form of perfect competition and monopoly, we turn to market structures
More informationChapter 9 Market Structure: Oligopoly
Economics for Managers by Paul Farnham Chapter 9 Market Structure: Oligopoly 9.1 Oligopoly A market structure characterized by competition among a small number of large firms that have market power, but
More informationVariable 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 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 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 informationc. Given your answer in part (b), what do you anticipate will happen in this market in the longrun?
Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm
More informationFinal 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 information1 st Exam. 7. Cindy's crossprice elasticity of magazine demand with respect to the price of books is
1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit
More informationOligopoly. 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 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 informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MBA 640, Survey of Microeconomics Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The "law of demand" states that, other
More informationChapter 14. Oligopoly
Chapter 14. Oligopoly Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 202 504 Principles of Microeconomics Oligopoly Market Oligopoly: A market structure in which a small number
More informationLecture 28 Economics 181 International Trade
Lecture 28 Economics 181 International Trade I. Introduction to Strategic Trade Policy If much of world trade is in differentiated products (ie manufactures) characterized by increasing returns to scale,
More informationMULTIPLE 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. 1) The fourfirm concentration ratio equals the percentage of the value of accounted for by the four
More information