Chapter 12. Monopolistic Competition and Oligopoly

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Chapter 12. Monopolistic Competition and Oligopoly"

Transcription

1 Chapter 12 Monopolistic Competition and Oligopoly

2 Topics to be Discussed Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners Dilemma Implications of the Prisoners Dilemma for Oligopolistic Pricing Cartels Chapter 12 2

3 Monopolistic Competition Characteristics 1. Many firms 2. Free entry and exit 3. Differentiated, but highly substitutable product Chapter 12 3

4 Monopolistic Competition The amount of monopoly power depends on the degree of differentiation Examples of this very common market structure include: Toothpaste Soap Cold remedies Chapter 12 4

5 A Monopolistically Competitive Firm in the Short and Long Run $/Q Short Run MC $/Q Long Run MC AC AC P SR P LR D SR D LR MR SR MR LR Q SR Quantity Q LR Quantity

6 A Monopolistically Competitive Firm in the Short and Long Run Short run Downward sloping demand differentiated product Demand is relatively elastic good substitutes MR < P Profits are maximized when MR = MC This firm is making economic profits Chapter 12 6

7 A Monopolistically Competitive Firm in the Short and Long Run Long run Profits will attract new firms to the industry (no barriers to entry) The old firm s demand will decrease to DLR Firm s output and price will fall Industry output will rise No economic profit (P = AC) P > MC some monopoly power Chapter 12 7

8 Monopolistically and Perfectly Competitive Equilibrium (LR) $/Q Perfect Competition $/Q Monopolistic Competition MC AC Deadweight loss MC AC P P C D = MR D LR MR LR Q C Quantity Q MC Quantity

9 Monopolistic Competition and Economic Efficiency The monopoly power yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle deadweight loss. With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. Chapter 12 9

10 Monopolistic Competition If inefficiency is bad for consumers, should monopolistic competition be regulated? Market power is relatively small. Usually there are enough firms to compete with enough substitutability between firms deadweight loss small. Inefficiency is balanced by benefit of increased product diversity may easily outweigh deadweight loss. Chapter 12 10

11 Oligopoly Characteristics Small number of firms Product differentiation may or may not exist Barriers to entry Scale economies Patents Technology Name recognition Strategic action (interaction between firms) Chapter 12 11

12 Oligopoly Equilibrium Actions and reactions are dynamic, evolving over time Defining Equilibrium Firms are doing the best they can and have no incentive to change their output or price All firms assume competitors are taking rival decisions into account Nash Equilibrium Each firm is doing the best it can given what its competitors are doing We will focus on duopoly Markets in which two firms compete Chapter 12 12

13 Oligopoly The Cournot Model Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce Firm will adjust its output based on what it thinks the other firm will produce Chapter 12 13

14 Oligopoly The Reaction Curve The relationship between a firm s profitmaximizing output and the amount it thinks its competitor will produce A firm s profit-maximizing output is a decreasing schedule of the expected output of Firm 2 Chapter 12 14

15 Reaction Curves and Cournot Equilibrium Q Firm 1 s reaction curve shows how much it will produce as a function of how much it thinks Firm 2 will produce. The x s correspond to the previous model. Firm 2 s Reaction Curve Q* 2 (Q 1 ) 50 x Firm 2 s reaction curve shows how much it will produce as a function of how much it thinks Firm 1 will produce. 25 x Firm 1 s Reaction Curve Q* 1 (Q 2 ) x x Q 2 Chapter 12 15

16 Reaction Curves and Cournot Equilibrium Q Firm 2 s Reaction Curve Q* 2 (Q 1 ) In Cournot equilibrium, each firm correctly assumes how much its competitors will produce and thereby maximizes its own profits. 50 x 25 x Firm 1 s Reaction Curve Q* 1 (Q 2 ) Cournot Equilibrium x x Q 2 Chapter 12 16

17 Oligopoly Cournot equilibrium is an example of a Nash equilibrium (Cournot-Nash Equilibrium) The Cournot equilibrium says nothing about the dynamics of the adjustment process Since both firms adjust their output, neither output would be fixed Chapter 12 17

18 The Linear Demand Curve An Example of the Cournot Equilibrium Two firms face linear market demand curve We can compare competitive equilibrium and the equilibrium resulting from collusion Market demand is P = 30 - Q Q is total production of both firms: Q = Q 1 + Q 2 Both firms have MC 1 = MC 2 = 0 Chapter 12 18

19 Duopoly Example Q 1 30 Firm 2 s Reaction Curve The demand curve is P = 30 - Q and both firms have 0 marginal cost. 15 Cournot Equilibrium 10 Firm 1 s Reaction Curve Q 2 Chapter 12 19

20 Oligopoly Example Firm 1 s Reaction Curve MR = MC Total Revenue : R 1 = PQ1 = 30 Q) ( Q 1 = 30Q 1 ( Q 1 + Q 2 ) Q 1 = 30Q 1 Q 2 1 Q Q 2 1 Chapter 12 20

21 Oligopoly Example An Example of the Cournot Equilibrium MR MR Q Q = ΔR = 0 = = = 15 1 ΔQ MC 2Q 2 2Q = 30 2Q Firm 1' s Reaction Curve Firm 2' s Reaction Curve 1 Q 2 Chapter 12 21

22 Oligopoly Example An Example of the Cournot Equilibrium Cournot Equilibrium : (15 1 Q = Q1 P = 30 + Q Q 2 = 20 = 10 2Q 1 ) = 10 Q1 = Q2 Chapter 12 22

23 Oligopoly Example Profit Maximization with Collusion R = MR MR PQ = (30 Q) Q = 30Q = ΔR ΔQ = 30 2Q = 0 when Q = 15 and MR Q 2 = MC Chapter 12 23

24 Duopoly Example Q 1 30 Firm 2 s Reaction Curve For the firm, collusion is the best outcome followed by the Cournot Equilibrium and then the competitive equilibrium Competitive Equilibrium (P = MC; Profit = 0) Cournot Equilibrium Collusive Equilibrium 7.5 Collusion Curve Firm 1 s Reaction Curve Q 2 Chapter 12 24

25 First Mover Advantage The Stackelberg Model Oligopoly model in which one firm sets its output before other firms do Firm 1 sets output first and Firm 2 then makes an output decision seeing Firm 1 s output Conclusion Going first gives Firm 1 the advantage Firm 1 s output is twice as large as Firm 2 s Firm 1 s profit is twice as large as Firm 2 s Going first allows Firm 1 to produce a large quantity. Firm 2 must take that into account and produce less unless it wants to reduce profits for everyone. Chapter 12 25

26 Price Competition Competition in an oligopolistic industry may occur with price instead of output The Bertrand Model is used Oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge Chapter 12 26

27 Competition Versus Collusion: The Prisoners Dilemma Nash equilibrium is a noncooperative equilibrium: each firm makes decision that gives greatest profit, given actions of competitors Although collusion is illegal, why don t firms cooperate without explicitly colluding? Why not set profit maximizing collusion price and hope others follow? Chapter 12 27

28 Competition Versus Collusion: The Prisoners Dilemma Competitor is not likely to follow Competitor can do better by choosing a lower price, even if they know you will set the collusive level price We can use example from before to better understand the firms choices Chapter 12 28

29 Competition Versus Collusion: The Prisoners Dilemma An example in game theory, called the Prisoners Dilemma, illustrates the problem oligopolistic firms face Two prisoners have been accused of collaborating in a crime They are in separate jail cells and cannot communicate Each has been asked to confess to the crime Chapter 12 29

30 Payoff Matrix for Prisoners Dilemma Prisoner B Confess Don t confess Confess -5, -5-1, -10 Prisoner A Would you choose to confess? Don t confess -10, -1-2, -2 Chapter 12 30

31 Oligopolistic Markets Conclusions 1. Collusion will lead to greater profits 2. Explicit and implicit collusion is possible 3. Once collusion exists, the profit motive to break and lower price is significant Chapter 12 31

32 Payoff Matrix for the P&G Pricing Problem Unilever and Kao Charge $1.40 Charge $1.50 Charge $1.40 $12, $12 $29, $11 P&G What price should P & G choose? Charge $1.50 $3, $21 $20, $20 Chapter 12 32

33 Observations of Oligopoly Behavior 1. In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur 2. In other oligopoly markets, the firms are very aggressive and collusion is not possible can lead to price rigidity. Chapter 12 33

34 Cartels Producers in a cartel explicitly agree to cooperate in setting prices and output Typically only a subset of producers are part of the cartel and others benefit from the choices of the cartel If demand is sufficiently inelastic and cartel is enforceable, prices may be well above competitive levels Chapter 12 34

35 Cartels Examples of successful cartels OPEC International Bauxite Association Mercurio Europeo Examples of unsuccessful cartels Copper Tin Coffee Tea Cocoa Chapter 12 35

36 Cartels To be successful: Total demand must not be very price elastic Either the cartel must control nearly all of the world s supply or the supply of noncartel producers must not be price elastic Chapter 12 36

C 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 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 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

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

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

Oligopoly: Introduction. Oligopoly. Oligopoly Models. Oligopoly: Analysis. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert

Oligopoly: 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 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

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

Chapter 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 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 information

Bertrand with complements

Bertrand 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 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

Solution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY

Solution 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 information

1. Suppose demand for a monopolist s product is given by P = 300 6Q

1. 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 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

Ecn 221 - Unit 10 Monopolistic Competition & Oligopoly

Ecn 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 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

COST OF PRODUCTION & THEORY OF THE FIRM

COST 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 information

Unit 8. Firm behaviour and market structure: monopolistic competition and oligopoly

Unit 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 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

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

Microeconomic Analysis

Microeconomic 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 information

Oligopoly and Strategic Pricing

Oligopoly 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 information

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

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 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 information

Exam No. 3 Date: 7 or 9 May Instructor: Brian B. Young

Exam 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 information

Market structures. 18. Oligopoly Gene Chang Univ. of Toledo. Examples. Oligopoly Market. Behavior of Oligopoly. Behavior of Oligopoly

Market structures. 18. Oligopoly Gene Chang Univ. of Toledo. Examples. Oligopoly Market. Behavior of Oligopoly. Behavior of Oligopoly Market structures 18. Oligopoly Gene Chang Univ. of Toledo We distinguish the market structure by examining the following characteristics in the industry: Number of firms in the industry Nature of the

More information

Oligopoly. What Is Oligopoly? What is Oligopoly?

Oligopoly. 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 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

Market Structure. Market Structure and Behaviour. Perfect competition. PC firm output

Market Structure. Market Structure and Behaviour. Perfect competition. PC firm output Market Structure Market Structure and Behaviour See chapters 10-12 in Mansfield et al Market: firms and individuals buy and sell Important social and legal preconditions Different structures depending

More information

CHAPTER 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 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 information

CHAPTER 6 MARKET STRUCTURE

CHAPTER 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 information

Chapter 16 Monopolistic Competition and Oligopoly

Chapter 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 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. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The four-firm concentration ratio equals the percentage of the value of accounted for by the four

More information

Microeconomics Required Graphs and Terms

Microeconomics Required Graphs and Terms Microeconomics Required Graphs and Terms Understanding and explaining the economic concepts required by the AP and IB exams rests on a solid knowledge of fundamental economic graphs and terms. In order

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

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 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 information

Lecture 12: Imperfect Competition

Lecture 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 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. 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 information

MONOPOLISTIC COMPETITION AND OLIGOPOLY

MONOPOLISTIC 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 information

New Technology and Profits

New Technology and Profits Another useful comparative statics exercise is to determine how much a firm would pay to reduce its marginal costs to that of its competitor. This will simply be the difference between its profits with

More information

Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly

Describe 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 information

Chapter 7 Monopoly and Oligopoly

Chapter 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 information

Economics 203: Intermediate Microeconomics I Lab Exercise #11. Buy Building Lease F1 = 500 F1 = 750 Firm 2 F2 = 500 F2 = 400

Economics 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 long-run payoffs for two duopolists faced

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

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

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

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. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More 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

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

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. 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 information

University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly

University 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 non-negligible influence on the market. In such markets, every

More information

Monopolistic Competition, Oligopoly, and maybe some Game Theory

Monopolistic 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 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

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

Lecture 11: Oligopoly and Strategic Behavior

Lecture 11: Oligopoly and Strategic Behavior Lecture 11: Oligopoly and Strategic Behavior Few Firms in the Market: Each aware of others actions Each firm in the industry has market power Entry is Feasible, although incumbent(s) may try to deter it.

More information

Econ 111 (04) 2nd Midterm A

Econ 111 (04) 2nd Midterm A Econ 111 (04) 2nd Midterm A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following does not occur in perfect competition? A)

More information

Chapter 9 Market Structure: Oligopoly

Chapter 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 information

Lecture 8: Market Structure and Competitive Strategy. Managerial Economics September 11, 2014

Lecture 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 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

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

Pre-Test Chapter 23 ed17

Pre-Test Chapter 23 ed17 Pre-Test Chapter 23 ed17 Multiple Choice Questions 1. The kinked-demand 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 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

Learning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition

Learning 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 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

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

The Basics of Game Theory

The 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 information

Competition and Regulation. Lecture 2: Background on imperfect competition

Competition and Regulation. Lecture 2: Background on imperfect competition Competition and Regulation Lecture 2: Background on imperfect competition Monopoly A monopolist maximizes its profits, choosing simultaneously quantity and prices, taking the Demand as a contraint; The

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK

INDUSTRIAL 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 information

Monopolistic Competition

Monopolistic Competition Monopolistic Competition and Product ifferentiation Outline for Lectures 19 and 20. Read Chapter 12 and the assigned class reading. Announcements What is Monopolistic Competition? Why oligopolists and

More information

Quick Review. Chapter 15: Figure 1 The Four Types of Market Structure

Quick 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 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

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

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

The Big Picture. Perfect Competition CHAPTER 14 SUMMARY CHAPTER 15 SUMMARY. Firms in Competitive Markets

The Big Picture. Perfect Competition CHAPTER 14 SUMMARY CHAPTER 15 SUMMARY. Firms in Competitive Markets The Big Picture Chapter 13: The cost of production Chapter 14-17:Look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter 14) 2. Monopoly (chapter 15) 3. Oligopoly

More information

What are the conditions that lead to a perfectly competitive market?

What are the conditions that lead to a perfectly competitive market? Review: Lecture 1. Idea of constrained optimization. Definitions of economics. Role of marginal analysis. Economics as a way to explain. Also used to predict. Chapter 1 and 2. What is a market? What are

More information

difficult to detect; barriers to entry are low; market demand conditions are unstable; and anti-trust action is vigorous. If we are talking about an

difficult to detect; barriers to entry are low; market demand conditions are unstable; and anti-trust action is vigorous. If we are talking about an OLIGOPOLY We have thus far observed that a certain portion of our market is characterized as competitive, monopolistically competitive and monopolies. However, we also know that some firms that exist today

More information

Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All

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

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

EC508: Microeconomic Theory Midterm 3

EC508: Microeconomic Theory Midterm 3 EC508: Microeconomic Theory Midterm 3 Instructions: Neatly write your name on the top right hand side of the exam. There are 25 points possible. Your exam solution is due Tuesday Nov 24, 2015 at 5pm. You

More information

LECTURE #13: MICROECONOMICS CHAPTER 15

LECTURE #13: MICROECONOMICS CHAPTER 15 LECTURE #13: MICROECONOMICS CHAPTER 15 I. WHY MONOPOLIES ARISE A. Competitive firms are price takers; a Monopoly firm is a price maker B. Monopoly: a firm that is the sole seller of a product without close

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. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

Chapter 11 Perfect Competition

Chapter 11 Perfect Competition Chapter 11 Perfect Competition Perfect Competition Conditions for Perfectly competitive markets Product firms are perfect substitutes (homogeneous product) Firms are price takers Reasonable with many firms,

More information

AGEC 105 Spring 2016 Homework 7. 1. Consider a monopolist that faces the demand curve given in the following table.

AGEC 105 Spring 2016 Homework 7. 1. Consider a monopolist that faces the demand curve given in the following table. AGEC 105 Spring 2016 Homework 7 1. Consider a monopolist that faces the demand curve given in the following table. a. Fill in the table by calculating total revenue and marginal revenue at each price.

More information

Oligopoly is a market structure more susceptible to game-theoretic analysis, because of apparent strategic interdependence among a few producers.

Oligopoly is a market structure more susceptible to game-theoretic analysis, because of apparent strategic interdependence among a few producers. 1 Market structure from a game-theoretic perspective: Oligopoly After our more theoretical analysis of different zero-sum and variable-sum games, let us return to the more familiar territory of economics---especially

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

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

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

Recap from last Session Determination of price and output in the short/long run Non Price Competition

Recap 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 Non-collusive models of oligopoly Non price

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

Economics Instructor Miller Oligopoly Practice Problems

Economics Instructor Miller Oligopoly Practice Problems Economics Instructor Miller Oligopoly Practice Problems 1. An oligopolistic industry is characterized by all of the following except A) existence of entry barriers. B) the possibility of reaping long run

More information

Directions: This problem set is graded. Feel free to ask me questions. Turn your answers in on the provided scantron form.

Directions: This problem set is graded. Feel free to ask me questions. Turn your answers in on the provided scantron form. Micro Problem Set III WCC Winter 2015 Directions: This problem set is graded. Feel free to ask me questions. Turn your answers in on the provided scantron form. A=True / B=False 20 Points 1) If price is

More information

NONCOOPERATIVE OLIGOPOLY MODELS

NONCOOPERATIVE 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 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

Lecture 28 Economics 181 International Trade

Lecture 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 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

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

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam. 7. Cindy's cross-price 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 information

LECTURE 10: MONOPOLISTIC COMPETITIO

LECTURE 10: MONOPOLISTIC COMPETITIO Lecture 10 A G S M 2004 Page 1 LECTURE 10: MONOPOLISTIC COMPETITIO Today s Topics: Brands and Adver tising 1. Between Monopoly and Perfect Competition: number of sellers? type of products? oligopolies,

More information