13. Monopolistic Competition and Oligopoly. CHAPTER. Profits, like sausages, are esteemed most by those that know least about what goes into them. Alvin Toffler Futurist, Author (1928 - ). C H A P T E R C H E C K L I S T.
Monopolistic Competition and Oligopoly
Profits, like sausages, are esteemed most by those that know least
about what goes into them.
(1928 - )
3 Explain the dilemma faced by firms in oligopoly.
4 Use game theory to explain how price and quantity are determined in oligopoly.
These firms are monopolistic in that each one has a monopoly on their brand, image, service, ambience, menu, etc. They are competitive in the sense that there are many, many of them, and consumers can easily sub one for another.
% of GDP
1. Profit is maximized when MR = MC.
2.The profit-maximizing output is 125 pairs of Tommy jeans per day.
3.The profit-maximizing price is $75 per pair.
ATC is $25 per pair, so
4. The firm makes an economic profit of $6,250 a day.
1. In LR, the output that maximizes profit is 75 pairs of Tommy jeans a day.
2. The price is $50 per pair. Average total cost is also $50 per pair.
3. Economic profit is zero.
1. The efficient scale is 100 pairs of Tommy jeans a day. (min ATC)
2. The firm produces less than the efficient scale and has excess capacity.
3. Price exceeds 4.marginal cost.
5. Deadweight loss arise.
Firms in an oligopoly are closely interdependent. Price and output changes will impact rivals, and likely draw some reaction from the rival firms.
Examples: airlines, aircraft, soft drinks, cellular service, computer chips, athletic shoes, cigarettes.
OLIGOPOLYThe Kinked Demand Curve
The demand curve will be “kinked” if rival oligopolists match price cuts, but not price increases.The Kinked Demand Curve
Profit max output is where the MR curve is discontinuous (where MC runs thru discontinuity). Marginal costs can increase or decrease without changing profit max output as long as MC stays in gap.
Response by other firms tends to discourage this firm from changing price, keeping prices stable (price rigidity).
Examples of Price FixingExamples of Price Fixing
School Milk – Between 1988 and 1991, the U.S. Justice Department filed charges against 50 companies for fixing the price of milk sold to public schools in 16 states.
Beer – In 2007, the European Commission fined Heineken and three other beer producers €273.7 (about $380 million) for operating a price fixing cartel in Holland. The beer cartel operated between 1996 and 1999 in the EU market.
Cases currently pending in court:
Chocolate – Hershey’s, Mars, Nestle and Cadbury (control 75% of chocolate candy industry) accused of conspiring to fix prices since 2002.
– Accused of price fixing and squeezing out internet competition by colluding with manufacturers on prices.
Price Leadership (Dominant Firm Strategy)
Table 13.5 shows the prisoners’ dilemma payoff matrix for Art and Bob.