1 / 17

Consumption, Production, Welfare B: Monopoly and Oligopoly (partial eq )

Consumption, Production, Welfare B: Monopoly and Oligopoly (partial eq ). Univ. Prof. dr. Maarten Janssen University of Vienna Winter semester 2013. MC. P. ATC. Q. Profit maximisation Monopolist. Profit. P M. ATC. D. Q M. MR. Profit π = P(Q)Q – C(Q). Pricing rule.

yasir-mcpherson
Download Presentation

Consumption, Production, Welfare B: Monopoly and Oligopoly (partial eq )

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Consumption, Production, Welfare B:Monopoly andOligopoly (partial eq) Univ. Prof. dr. Maarten Janssen University of Vienna Winter semester 2013

  2. MC P ATC Q Profit maximisation Monopolist Profit PM ATC D QM MR Profit π = P(Q)Q – C(Q) Pricing rule Whenismonopolyoutcome Pareto inefficient?

  3. On which part of demand curve is the monopolist’s price? P Demand Q Q Marginal revenue = Elastic Inelastic Demand curveiselasticwhereorelasticityis larger than 1. Total Revenue (€) MR Total revenue=PQ

  4. Oligopoly: betweenmonopolyandperfectcompetition • On demandsidealwaysmanyconsumerswhotakepricesasgiven • On supplyside • Underperfectcompetition, firmstakepricesasgiven (problemswithincreasingreturnstoscale) • Undermonopoly, one firm takeseffect on priceintoaccount (lookatpreviousformulaes) • Middleground: whatiftherearesomefirms (morethanone, not many) • Havetotakeactions, reactionsintoaccount (gametheory) • Subtletiesimportant, forexample, whatarethedecision variables (priceorquantity) ofthefirms • Here, twobasicmodels: Cournot (quantity) and Bertrand (price)

  5. Cournot Model 2 (or more) firms Market demand is P(Q) Firm icost is C(q) Firm iacts in the belief that all other firms will put some amount Q-iin the market. Then firm imaximizes profits obtained from serving residual demand: P’ = P(Q) - Q-i For each output produced by the others, firm is the monopolist for the residual demand

  6. P(q1) P(q1, Q-1 =10) Market demand P(Q)=P(q1,Q-1=0) P(q1, Q–1 =20) q1 Demand and Residual Demand

  7. Cournot Reaction Functions • Firm 1’s reaction (or best-response) function is a schedule summarizing the quantity q1 firm 1 should produce in order to maximize its profits for each quantity Q-1produced by all other firms. • Since the products are (perfect) substitutes, an increase in competitors’ output leads to a decrease in the profit-maximizing amount of firm 1’s product ( reaction functions are downward sloping). • Check for monopoly

  8. MC P ATC Q Profit maximisationMonopolist for different demands Profit PM ATC D D‘ MR’ QM MR Profit π = P(Q)Q – C(Q) Pricing rule Whenismonopolyoutcome Pareto inefficient?

  9. Cournot Model A firm can only decide bout what it will produce. It has to take as given what others produce. What others produce is, however, relevant. The problem Max{(P(qi+Q-i) qi – C(qi)} defines the best-response (or reaction) function of firm i to a conjecture Q-ias follows: P’(qi+Q-i)qi + P(qi+Q-i) – C’(qi) = 0 Linear case on blackboard Q-i Firm i’s reaction Function r1 qi qiM qi*(qj) qj Q-i=0

  10. Cournot Equilibrium • Situation where each firm produces the output that maximizes its profits, given a conjecture about the output of rival firms • Conjectures about what the others produce are correct • No firm can gain by unilaterally changing its own output

  11. q2 r1 Cournot equilibrium q2M r2 q1M q1 Cournot Equilibrium • q1* maximizes firm 1’s profits, given that firm 2 produces q2* • q2* maximizes firm 2’s profits, given firm 1’s output q1* • No firm wants to change its output, given the rival’s • Beliefs are consistent: each firm “thinks” rivals will stick to their current output, and they do so!

  12. Rewriting optimal decisionrule • Can wedetectmonopolypricingruleas a specialcase? • Isperfectcompetitionanotherspecialcase?

  13. Properties of Cournot equilibrium • The pricing rule of a Cournotoligopolistsatisifes: • Cournotoligopolists exercise market power: • Cournot mark-ups are lower than monopoly markups • Market power is limited by the elasticity of demand • More efficient firms will have a larger market share. • The more firms, the lower will be each firm’s individual market share and market power.

  14. SymmetricCournotcompetitionwith N firms; linear case • Demand isgivenby; marginal costequalsc. • Optimal ruleundersymmetrygivesorormarketoutput • Increasingordecreasing in N? Can werecognizemonopolyandperfectcompetition (P=c) as extremes? • Competitivemodelisreallythelimitofoligopolymodel.

  15. Bertrand Model • 2 (or more) firms • Firms produce identical products at constant marginal cost. • Each firm independently sets its price in order to maximize profits • Consumers enjoy • Perfect information • Zero transaction costs

  16. Bertrand Equilibrium • Firms set P1 = P2 = MC! Why? • Suppose MC < P1 < P2 • Firm 1 earns (P1 - MC) on each unit sold, while firm 2 earns nothing • Firm 2 has an incentive to slightly undercut firm 1’s price to capture the entire market • Firm 1 then has an incentive to undercut firm 2’s price. This undercutting reasoning continues... • Equilibrium: Each firm charges P1 = P2 = MC

  17. Bertrand Paradox • Two firms are enough to eliminate market power • If firms are symmetric, market power is eliminated entirely • If firms are asymmetric (MC1 < MC2), market power is substantially reduced • Solutions (in course on Industrial Organization): • Capacity constraints • Repeated interaction • Product differentiation • Imperfect information

More Related