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Chapter 11 The World of Imperfect Competition. 1. MONOPOLISTIC COMPETITION: COMPETITION AMONG MANY. Learning Objectives

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Chapter 11 The World of Imperfect Competition


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Chapter 11

The World of Imperfect Competition

1 monopolistic competition competition among many
1. MONOPOLISTIC COMPETITION: COMPETITION AMONG MANY

Learning Objectives

  • Explain the main characteristics of a monopolistically competitive industry, describing both its similarities and differences from the models of perfect competition and monopoly.
  • Explain and illustrate both short-run equilibrium and long-run equilibrium for a monopolistically competitive firm.
  • Explain what it means to say that a firm operating under monopolistic competition has excess capacity in the long run and discuss the implications of this conclusion..
  • Imperfect competition refers to a market structure with more than one firm in an industry in which at least one firm is a price setter.
  • Monopolistic competition refers to a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit.
1 1 profit maximization
1.1 Profit Maximization

18.25

ATC

MC

10.40

9.20

2,150

D1

MR1

1 1 profit maximization1
1.1 Profit Maximization

18.25

ATC

17.50

MC

A

MR2

D1

MR1

D2

1 2 excess capacity the price of variety
1.2 Excess Capacity: The Price of Variety
  • Excess capacity refers to a situation in which a firm operates to the left of the lowest point on its average total cost curve.
2 oligopoly competition among the few
2. OLIGOPOLY: COMPETITION AMONG THE FEW
  • Learning Objectives
  • Explain the main characteristics of an oligopoly, differentiating it from other types of market structures.
  • Explain the measures that are used to determine the degree of concentration in an industry.
  • Explain and illustrate the collusion model of oligopoly.
  • Discuss how game theory can be used to understand the behavior of firms in an oligopoly.
  • Oligopoly refers to a situation in which a market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it.
2 1 measuring concentration in oligopoly
2.1 Measuring Concentration in Oligopoly
  • Concentration ratio is the percentage of output accounted for by the largest firms in an industry.
  • Herfindahl-Hirschman Indexis an alternative measure of concentration found by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares.
2 2 the collusion model
2.2 The Collusion Model
  • Duopoly is an industry that has only two firms.
  • Overt collusionis when firms openly agree on price, output, and other decision aimed at achieving monopoly profits.
  • A Cartel consists of firms that coordinate their activities through overt collusion and by forming collusive coordinating mechanisms.
  • Tacit collusion is an unwritten, unspoken understanding through which firms agree to limit their competition.
monopoly through collusion
Monopoly through Collusion

PM

MC

PC

C

B

A

MRfirm

Dfirm = MRcombined

Dcombined

1/2QM

QM

QC

2 3 game theory and oligopoly behavior
2.3 Game Theory and Oligopoly Behavior
  • Strategic choice is a choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account.
  • Game theoryis an analytical approach through which strategic choices can be assessed.
  • A payoff is the outcome of a strategic decision.
  • A Dominant strategy is when a player’s best strategy is the same regardless of the action of the other player.
  • A Dominant strategy equilibrium is a game in which there is a dominant strategy for each player.
repeated oligopoly games
Repeated Oligopoly Games
  • A tit-for-tat strategy is a situation in which a firm responds to cheating by cheating, and responds to cooperative behavior by cooperating.
  • A trigger strategyis a situation in which a firm makes clear that it is willing and able to respond to cheating by permanently revoking an agreement.
3 extensions of imperfect competition advertising and price discriminiation
3. EXTENSIONS OF IMPERFECT COMPETITION: ADVERTISING AND PRICE DISCRIMINIATION
  • Learning Objectives
  • Discuss the possible effects of advertising on competition, price, and output.
  • Define price discrimination, list the conditions that make it possible, and explain the relationship between the price charged and price elasticity of demand.
3 1 advertising
3.1 Advertising
  • Firms use advertising when they expect it to increase their profits.
  • Advertising could lead to higher prices for consumer by:
    • Increased costs shift supply
    • Demand shifts
  • Advertising and information
  • Advertising and competition
3 2 price discrimination
3.2 Price Discrimination
  • Price discrimination refers to a situation in which a firm changes different prices for the same good or service to different consumers, even though there is no difference in the cost to the firm of supplying these consumers.
    • E.g. student and senior discounts on city buses, children’s admission price at movie theater, physicians charging wealthy patients more than they charge poor patients.
  • For price discrimination monopoly power is one of three conditions which must be met. The others include:
    • A price-setting firm
    • Distinguishable customers
    • Prevention of resale