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Part Two: Microeconomics of Product Markets. CHAPTER 9 Monopolistic Competition and Oligopoly. 1. 9.1 Characteristics of Monopolistic Competition. Relatively Large Number of Sellers Small Market Shares No Collusion Independent Action. 2. Characteristics of Monopolistic Competition.

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CHAPTER 9 Monopolistic Competition and Oligopoly

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Chapter 9 monopolistic competition and oligopoly

Part Two: Microeconomics of Product Markets

  • CHAPTER 9

  • Monopolistic Competition and Oligopoly

Slides prepared by Bruno Fullone, George Brown College. Edited by Laura Lamb

1


Chapter 9 monopolistic competition and oligopoly

9.1 Characteristics of Monopolistic Competition

  • Relatively Large Number of Sellers

    • Small Market Shares

    • No Collusion

    • Independent Action

Slides prepared by Bruno Fullone, George Brown College

2


Chapter 9 monopolistic competition and oligopoly

Characteristics of Monopolistic Competition

Differentiated Products

Product Attributes

Service

Location

Brand Names and Packaging

Some Control Over Price

Slides prepared by Bruno Fullone, George Brown College

3


Chapter 9 monopolistic competition and oligopoly

Figure 9-2 Monopolistic Competition

Short-Run Profits

ATC

MC

P1

A1

Price and Costs

Economic

Profit

D1

MR = MC

MR

0

Q1

Quantity

Slides prepared by Bruno Fullone, George Brown College

4


Chapter 9 monopolistic competition and oligopoly

Monopolistic Competition

Short-Run Losses

ATC

MC

A2

P2

Loss

Price and Costs

D2

MR = MC

MR

0

Q2

Quantity

Slides prepared by Bruno Fullone, George Brown College

5


Chapter 9 monopolistic competition and oligopoly

Monopolistic Competition

Long-Run Equilibrium

MC

ATC

P3= A3

Price and Costs

D3

MR = MC

MR

0

Q3

Quantity

Slides prepared by Bruno Fullone, George Brown College

6


Complicating factors

Complicating factors

  • Some firms may earn economic profits greater than zero in the long run.

    • Why?

Slides prepared by Bruno Fullone, George Brown College


Chapter 9 monopolistic competition and oligopoly

Monopolistic Competition and Efficiency

1. Allocative Efficiency

P > MC

Too little is produced

2. Productive Efficiency

Costs high

Excess capacity

Slides prepared by Bruno Fullone, George Brown College

8


Product variety

Product Variety

  • Benefits

    • Better match to consumer tastes

    • Better products

    • Tradeoff between variety and efficiency

  • Further Complexity

    • Price, product, and advertising must be juggled to achieve maximum profit

Slides prepared by Bruno Fullone, George Brown College

9


9 3 oligopoly characteristics

9.3 Oligopoly: Characteristics

A Few Large Producers

Homogeneous or Differentiated Products

Control Over Price, but Mutual Interdependence

Entry Barriers

Economies of scale

High capital costs

Ownership of raw materials

Mergers

Slides prepared by Bruno Fullone, George Brown College

10


Two ways to measure industry concentration

Two ways to measure industry concentration

1. Concentration ratio

  • The four-firm concentration ratio gives the percentage of total industry sales accounted for by the four largest firms.

Slides prepared by Bruno Fullone, George Brown College


Chapter 9 monopolistic competition and oligopoly

4775

4365

Herfindahl Index

3481

2453

2273

2069

1965

1038

Slides prepared by Bruno Fullone, George Brown College


9 4 game theory overview

9.4 Game Theory Overview

  • Oligopolists must make plans in light of the actions and expected reactions of their rivals

  • Basic concepts:

    • Players

    • Rules

    • Strategies

    • Payoffs

  • Equilibrium

Slides prepared by Bruno Fullone, George Brown College

13


Two prisoners cannot communicate difficult to cooperate even when mutually beneficial

Prisoner’s Dilemma

Two prisoners cannot communicate

Difficult to cooperate, even when mutually beneficial

Slides prepared by Bruno Fullone, George Brown College

14


Prisoner s dilemma payoff matrix

Prisoner’s Dilemma Payoff Matrix

Al’s strategies

Figure 9-5

Not confess

Confess

4

B

12

A

Bruno’s strategies

Confess

1

4

C

1

D

2

Not

confess

12

2

Slides prepared by Bruno Fullone, George Brown College


Profit payoff for a two firm oligopoly

Profit Payoff for a Two-Firm Oligopoly

RareAir’s price strategy

If both firms

choose a high-price strategy, each

earns $12 million in profit

Collusive tendencies

Low

High

Uptown’s price strategy

$12

B

$15

A

High

$6

$12

C

$6

D

$8

Low

$15

$8

Slides prepared by Bruno Fullone, George Brown College


Chapter 9 monopolistic competition and oligopoly

9.5 The Incentives and Obstacles to Collusion: Two Oligopoly Strategies

  • Two distinct pricing strategies:

    • Collusive pricing

    • Price leadership

  • There is no one simple model to predict outcomes due to:

    • Diversity of oligopolies

    • Complications of interdependence

Slides prepared by Bruno Fullone, George Brown College


Cartels and other collusion cooperative strategies

Cartels and Other Collusion: Cooperative Strategies

  • Collusion: any agreement to fix prices, divide up the market, or otherwise restrict competition

  • Each firm acts as if it were a pure monopolist

  • Illustrated…

Slides prepared by Bruno Fullone, George Brown College


Collusion and joint profit maximization

Collusion and Joint-Profit Maximization

MC

P

Figure 9-7

Price and Costs

ATC

P0

Economic profit

A0

D

MR=MC

MR

Q

Q0

Slides prepared by Bruno Fullone, George Brown College


Chapter 9 monopolistic competition and oligopoly

Cartels and Other Collusion: Cooperative Strategies

  • Three identical firms

  • Each firm finds it most profitable to charge P0, but only if its rivals do

  • The answer: collude and agree on price P0

Slides prepared by Bruno Fullone, George Brown College


Chapter 9 monopolistic competition and oligopoly

Overt Collusion – The OPEC Cartel

Slides prepared by Bruno Fullone, George Brown College

21


Obstacles to collusion

Obstacles to Collusion

Demand and Cost Differences

Number of Firms

Cheating

Recession

Potential Entry

Legal Obstacles: Competition Policy

Slides prepared by Bruno Fullone, George Brown College

22


Price leadership model

Price Leadership Model

Dominant firm leads the way

Leadership strategy:

Infrequent Price Changes

Communications

Limit Pricing

Breakdowns in price leadership: price wars

Slides prepared by Bruno Fullone, George Brown College

23


9 6 oligopoly and advertising

9.6 Oligopoly and Advertising

Oligopolists prefer not to compete on price

Product development and advertising preferred:

Less easily duplicated

Oligopolists have sufficient financial resources

Slides prepared by Bruno Fullone, George Brown College

24


Positive effects of advertising

Positive Effects of Advertising

Low cost source of information

Can diminish monopoly power

Can speed up technological progress

Slides prepared by Bruno Fullone, George Brown College

25


Potential negative effects of advertising

Potential Negative Effects of Advertising

Only persuasion

Misleading claims

Barrier to entry

Self-cancelling advertising

Slides prepared by Bruno Fullone, George Brown College

26


Global perspective 9 2

Global Perspective 9.2

Slides prepared by Bruno Fullone, George Brown College

27


Oligopoly and efficiency

Oligopoly and Efficiency

Impossible to say anything definitive

Outcomes could be identical to monopoly

Unlikely because of:

Increased foreign competition

Limit pricing

Technological advance

Slides prepared by Bruno Fullone, George Brown College

28


The last word oligopoly in the beer industry

The Last Word: Oligopoly in the Beer Industry

Since WW II degree of concentration has been increasing, mostly due to mergers

Today 80% of production controlled by 2 major companies

However, imports and microbreweries are starting to eat away at market share of majors

Slides prepared by Bruno Fullone, George Brown College

29


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