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Other Industry Structures

Other Industry Structures. Holmes Econ 10. Coverage. Cartels/Collusion Monopolistic Competition Oligopoly. Cartels/Collusion. Many firms acting as one Examples: DeBeers (diamonds) Sunkist (oranges) OPEC (oil) Result: monopoly output with many firms. Game: Prisoner’s Dilemma. Clyde.

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Other Industry Structures

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  1. Other Industry Structures Holmes Econ 10

  2. Coverage • Cartels/Collusion • Monopolistic Competition • Oligopoly

  3. Cartels/Collusion • Many firms acting as one • Examples: • DeBeers (diamonds) • Sunkist (oranges) • OPEC (oil) • Result: monopoly output with many firms

  4. Game: Prisoner’s Dilemma Clyde Bonnie If Bonnie confesses and Clyde does not, then Bonnie gets $2 and Clyde sings. Where are they happiest? A: Both don’t confess. If you are Bonnie and Clyde doesn’t confess, what should you do? If you are Bonnie and Clyde confesses, what should you do? There is an incentive to cheat.

  5. PD and Collusion Group is best when all cooperate (keep output low). Cheat ==> lower profits for all. Some notable examples of collusion in the US: American/EasySabre Archer Daniels Midland

  6. Monopolistic Competition • Many firms • Similar products • Some perceived differences • Downward sloping demand • Examples: gas stations, pizzerias

  7. Compared to monopoly, MC has... • …more elastic demand • …tendency towards zero profit. MC $ ATC AVC D MR Q

  8. Why to zero profit? If firms are making profit, others enter. What happens to demand for PH pizza when new pizzeria? MC $ ATC A: D falls AVC D MR Q

  9. Why to zero profit? If firms are making profit, others enter. What happens to demand for PH pizza when new pizzeria? MC $ ATC A: D falls AVC D MR Q

  10. Why to zero profit? If firms are making profit, others enter. What happens to demand for PH pizza when new pizzeria? MC $ ATC A: D falls AVC D MR Q

  11. Tables • Same as monopoly • Practice problems on web

  12. DWL Which is government more likely to be interested in? Windows PH pizza P P MC MC ATC ATC D AVC AVC MC D MC Q Q

  13. Oligopoly • Few firms • High interdependence • Many models • Examples: • almost everything: airlines, soda, fast food...

  14. Game: Hotelling Ice Cream on beach exercise

  15. Real world examples? • Location • Car dealers • Interstate: Fast food • Other • gimmicks (rugrats, etc.) • warranties • sales: Coke/Pepsi • political: Median voter theorem

  16. Strategic Behavior • Firms anticipate and react to competitors’ actions • Game theory: viewing agents as playing a game

  17. An entry/exit game (old, new) NEW FIRM OLD FIRM -2, -2 Enter Big Factory 4, 0 Don’t Enter Old anticipates what new will do. 2, 2 Small Factory Enter 6, 0 Don’t Enter

  18. The end

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