Bài giảng MicroEconomics - Chapter 11 Monopolistic Competition and Oligopoly

Monopolistic Competition and Oligopoly11 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinFour Market ModelsLO1Characteristics of the Four Basic Market ModelsCharacteristicPure CompetitionMonopolistic CompetitionOligopolyMonopolyNumber of firmsA very large numberManyFewOneType of productStandardizedDifferentiatedStandardized or differentiatedUnique; no close subs.Control over priceNoneSome, but within rather narrow limitsLimited by mutual inter-dependence; considerable with collusionConsiderableConditions of entryVery easy, no obstaclesRelatively easySignificant obstaclesBlockedNonprice competitionNoneConsiderable emphasis on advertising, brand names, trademarksTypically a great deal, particularly with product differentiationMostly public relation advertisingExamplesAgricultureRetail trade, dresses, shoesSteel, auto, farm implementsLocal utilities11-2Monopolistic CompetitionRelatively large number of sellersDifferentiated productsEasy entry and exitAdvertisingLO111-3Monopolistically Competitive Industry concentrationMeasured by:Four-firm concentration ratiosPercentage of 4 largest firmsHerfindahl index Sum of squared market sharesLO14-Firm CR =Output of four largest firmsTotal output in the industryHI = (%S1)2 + (%S2)2 + (%S3)2 + . + (%Sn)211-4Price and Output in Monopolistic CompDemand is highly elasticShort run profit or lossProduce where MR=MCLong run normal profitEntry and exitInefficientProduct varietyLO211-5The Short Run: Profit or LossLO2QuantityPrice and CostsMR = MCMCMRD1ATCEconomicProfitQ1A1P1011-6The Short Run: Profit or LossLO2QuantityPrice and CostsMCMRD2ATCLossQ2A2P20MR = MC11-7The Long Run: Only a Normal ProfitLO2QuantityPrice and CostsMCMRD3ATCQ3P3= A30MR = MC11-8Monopolistic Competition: EfficiencyInefficientProductive inefficiencyP > ATCAllocative inefficiencyP > MCLO211-9Monopolistic Competition: EfficiencyLO2P=MC=Min ATC for pure competition (recall)P4Q4Price is LowerExcess Capacity atMinimum ATCMonopolistic competition is not efficient11-10Product VarietyThe firm constantly manages price, product, and advertisingBetter product differentiationBetter advertisingThe consumer benefits by greater array of choices and better productsTypes and stylesBrands and qualityLO211-11OligopolyA few large producersHomogeneous or differentiated productsLimited control over priceMutual interdependenceStrategic behaviorEntry barriersMergersLO311-12Oligopolistic IndustriesFour-firm concentration ratio40% or more to be oligopolyShortcomingsLocalized marketsInter-industry competitionWorld priceDominant firmsLO311-13Game Theory OverviewOligopolies display strategic pricing behaviorMutual interdependenceCollusionIncentive to cheatPrisoner’s dilemmaLO411-14Game Theory OverviewLO4RareAir’s Price StrategyUptown’s Price StrategyABCD$12$12$15$6$8$8$6$15HighHighLowLow2 competitors2 price strategiesEach strategy has a payoff matrixGreatest combined profitIndependent actions stimulate a response11-15Game Theory OverviewLO4RareAir’s Price StrategyUptown’s Price StrategyABCD$12$12$15$6$8$8$6$15HighHighLowLowIndependently lowered prices in expectation of greater profit leads to worst combined outcomeEventually low outcomes make firms return to higher prices.11-16Three Oligopoly ModelsKinked-demand curveCollusive pricingPrice leadershipReasons for 3 modelsDiversity of oligopoliesComplications of interdependenceLO511-17Kinked-Demand CurveLO5P0MR2D2D1MR1efgRivals IgnorePrice IncreaseRivals MatchPrice DecreaseQ0MR2D2D1MR1Q0MC1MC2P0efgPricePriceQuantityQuantity0011-18Kinked-Demand CurveCriticismsExplains inflexibility, not pricePrices are not that rigidPrice warsLO611-19Cartels and Other CollusionLO6DMR=MCATCMCMRP0A0Q0EconomicProfit11-20Overt CollusionCartels - a group of firms or nations that colludeFormally agreeing to the price Sets output levels for membersCollusion is illegal in the United StatesOPECLO611-21Obstacles to CollusionDemand and cost differencesNumber of firms CheatingRecessionNew entrantsLegal obstaclesLO611-22Price Leadership ModelPrice LeadershipDominant firm initiates price changesOther firms follow the leaderUse limit pricing to block entry of new firmsPossible price warLO611-23Oligopoly and AdvertisingPrevalent to compete with product development and advertisingLess easily duplicated than a price changeFinancially able to advertise LO711-24AdvertisingLO7Positive Effects Negative Effects Low-cost way of providing information to consumersCan be manipulativeEnhances competitionContains misleading claims that confuse consumersSpeeds up technological progressConsumers pay high prices for a good while forgoing a better, lower priced, unadvertised version of the productCan help firms obtain economies of scale11-25Oligopoly and EfficiencyOligopolies are inefficientProductively inefficient P > minATCAllocatively inefficient P > MCQualificationsIncreased foreign competitionLimit pricingTechnological advanceLO711-26