ch11 microeconomics

8/10/2019 ch11 microeconomics

1/31

Fernando & YvonnQuijano

Prepared by:

MonopolisticCompetition

and Oligopoly

12

CHA

P

TE

R

Copyright 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.


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Chapter12:Monop

olisticCompetition

andOligopoly

2 of 35Copyright 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.

CHAPT! 12 O"T#$%

(2.( "onopoistic Co#petition

(2.2 )igopoy

(2.* Price Co#petition

(2.+ Co#petition ersus Cousion-The Prisoners /ie##a

(2. I#pications o& the Prisoners /ie##a &or

)igopoistic Pricing

(2.1 Cartes


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Chapter12:Monop

olisticCompetition

andOligopoly


Monopolistic Competition and Oligopoly

monopolistic competition "ar$et in hich &ir#s canenter &reey, each producing its on brand or ersion o& adi&&erentiated product.

oligopoly "ar$et in hich ony a &e &ir#s co#peteith one another, and entry by ne &ir#s is i#peded.

cartel "ar$et in hich so#e or a &ir#s e3picitycoude, coordinating prices and output ees to

#a3i#i4e 5oint pro&its.


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Chapter12:Monop

olisticCompetition

andOligopoly

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")6)P)7I8TIC C)"PETITI)6(2.(

The "a$ings o& "onopoistic Co#petition

A #onopoisticay co#petitie #ar$et has to $ey characteristics-

(. ir#s co#pete by seing di&&erentiated products that are highysubstitutabe &or one another but not per&ect substitutes. In other

ords, the cross:price easticities o& de#and are arge but notin&inite.

2. There is free entry and exit:it is reatiey easy &or ne &ir#s toenter the #ar$et ith their on brands and &or e3isting &ir#s toeae i& their products beco#e unpro&itabe.


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Chapter12:Monop

olisticCompetition

andOligopoly



E;uiibriu# in the 8hort Run and the 7ong Run

,

price aso e3ceedsaerage cost, and the&ir# earns pro&itsshon by the yeo:shaded rectange.

A MonopolisticallyCompetiti'e (irm in the)hort and #ong !*n

(ig*re 12+1


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Chapter12:Monop

olisticCompetition

andOligopoly

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E;uiibriu# in the 8hort Run and the 7ong Run

In the ong run, thesepro&its attract ne &ir#sith co#peting brands.

The &ir#s #ar$et share&as, and its de#andcure shi&ts donard.

In ong:run e;uiibriu#,described in part =b>,price e;uas aeragecost, so the &ir# earns

4ero pro&it een thoughit has #onopoy poer.

A MonopolisticallyCompetiti'e (irm in the)hort and #ong !*n

(ig*re 12+1 -contin*ed.


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Chapter12:Monop

olisticCompetition

andOligopoly

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"onopoistic Co#petition and Econo#ic E&&iciency

?nder per&ectco#petition, pricee;uas #argina cost.

The de#and cure&acing the &ir# ishori4onta, so the 4ero:pro&it point occurs atthe point o& #ini#u#aerage cost.

Comparison ofMonopolisticallyCompetiti'e 0*ilibri*mand Perfectly Competiti'e0*ilibri*m

(ig*re 12+2


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Chapter12:Monop

olisticCompetition

andOligopoly

of 35Copyright 2009 Pearson Education, Inc. Pubishing as Prentice Ha ! "icroecono#ics ! Pindyc$%Rubin&ed, 'e.


"onopoistic Co#petition and Econo#ic E&&iciency

?nder #onopoisticco#petition, pricee3ceeds #argina cost.

Thus there is adeadeight oss, asshon by the yeo:shaded area.

The de#and cure is

donard:soping, sothe 4ero:pro&it point isto the e&t o& the point oini#u# aerage cost.

Comparison ofMonopolisticallyCompetiti'e 0*ilibri*mand Perfectly Competiti'e0*ilibri*m

(ig*re 12+2 -contin*ed.

In both types o& #ar$ets, entry occurs unti pro&its are drien to4ero.

In eauating #onopoistic co#petition, these ine&&iciencies#ust be baanced against the gains to consu#ers &ro#product diersity.


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Chapter12:MonopolisticCompetitionandOligopoly

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TA# 12+1 lasticities of 4emand for rands of Colasand Coffee


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)7I)P)7(2.2

The "a$ings o& )igpoistic Co#petition

In oigopoistic #ar$ets, the products #ay or #ay not be

di&&erentiated.

hat #atters is that ony a &e &ir#s account &or #ost or a o& tota

production.

In so#e oigopoistic #ar$ets, so#e or a &ir#s earn substantia

pro&its oer the ong run because barriers to entry #a$e it di&&icut or

i#possibe &or ne &ir#s to enter.

)igopoy is a preaent &or# o& #ar$et structure. E3a#pes o&

oigopoistic industries incude auto#obies, stee, au#inu#,petroche#icas, eectrica e;uip#ent, and co#puters.


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)7I)P)7(2.2

E;uiibriu# in an )igopoistic "ar$et

When a market is in equilibrium, firms are doing the best they can

and have no reason to change their price or output.

%ash 0*ilibri*m E;uiibriu# in oigopoy #ar$ets #eans that

each &ir# i ant to do the best it can given what its competitorsare doing,and these competitors will do the best they can given

what that firm is doing.

%ash e0*ilibri*m 8et o& strategies or actions in hich

each &ir# does the best it can gien its co#petitors actions.

d*opoly "ar$et in hich to &ir#s co#pete ith each other.


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)7I)P)7(2.2

The Cournot "ode

Co*rnot model )igopoy #ode in hich &ir#s produce aho#ogeneous good, each &ir# treats the output o& its co#petitors as&i3ed, and a &ir#s decide si#utaneousy ho #uch to produce.

ir# (s pro&it:#a3i#i4ing output depends onho #uch it thin$s that ir# 2 i produce.

I& it thin$s ir# 2 i produce nothing, itsde#and cure, abeed D(=0>, is the #ar$et

de#and cure. The corresponding #arginareenue cure, abeed "R(=0>, intersects

ir# (s #argina cost cure "C(at an output

o& 0 units.

I& ir# ( thin$s that ir# 2 i produce 0units, its de#and cure, D(=0>, is shi&ted to

the e&t by this a#ount. Pro&it #a3i#i4ationno i#pies an output o& 2 units.

inay, i& ir# ( thin$s that ir# 2 iproduce ' units, ir# ( i produce ony(2. units.

(irm 16s O*tp*t 4ecision

(ig*re 12+3


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)7I)P)7(2.2

The Cournot "ode

reaction c*r'e Reationship beteen a &ir#s pro&it:#a3i#i4ing

output and the a#ount it thin$s its co#petitor i produce.

Co*rnot e0*ilibri*m E;uiibriu# in the Cournot #ode in hicheach &ir# correcty assu#es ho #uch its co#petitor i produceand sets its on production ee accordingy.

ir# (s reaction cure shosho #uch it i produce as a

&unction o& ho #uch it thin$sir# 2 i produce.

ir# 2s reaction cure shos itsoutput as a &unction o& ho #uchit thin$s ir# ( i produce.

In Cournot e;uiibriu#, each &ir#correcty assu#es the a#ount

that its co#petitor i produceand thereby #a3i#i4es its onpro&its. There&ore, neither &ir#i #oe &ro# this e;uiibriu#.

!eaction C*r'esand Co*rnot 0*ilibri*m

(ig*re 12+&


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)7I)P)7(2.2

The 7inear /e#and CureFAn E3a#pe

/uopoists &ace the &ooing #ar$et de#and curePG *0 @

Aso,"C(G "C2G 0

Tota reenue &or &ir# (- !(G P(G =*0 @>( then

"R(G !(%(G *0 @ 2(@2

8etting "R(G 0 =the &ir#s #argina cost> and soing &or (, e &ind

"irm #$s reaction curve:


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)7I)P)7(2.2


I& the to &ir#s coude, then the tota pro&it:#a3i#i4ing ;uantity canbe obtained as &oos-

Tota reenue &or the to &ir#s-

!G PG =*0 @> ( )*@ 2, then

"R G !%G *0 @ 2

8etting "R G 0 =the &ir#s #argina cost> e &ind that tota pro&it is#a3i#i4ed at G (.

Then, ( 2G ( is the collusion curve.

I& the &ir#s agree to share pro&its e;uay, each i produce ha& o&the tota output-

Q17 Q27 /+5


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)7I)P)7(2.2


The de#and cure is PG*0 D , and both &ir#shae 4ero #argina cost.In Cournot e;uiibriu#,each &ir# produces (0.

The cousion cure shosco#binations o& ( and 2

that #a3i#i4e totalpro&its.

I& the &ir#s coude andshare pro&its e;uay, eachi produce '..

Aso shon is theco#petitie e;uiibriu#, inhich price e;uas#argina cost and pro&it is4ero.

4*opoly 8ample

(ig*re 12+5


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)7I)P)7(2.2

irst "oer AdantageFThe 8tac$eberg "ode

)tac9elberg model )igopoy #ode in hich one &ir# sets its

output be&ore other &ir#s do.

+uppose "irm # sets its output first and then "irm %, after observing

"irm #$s output, makes its output decision. In setting output, "irm #must therefore consider how "irm % will react.

PG *0 @

Aso,"C(G "C2G 0

"irm %$s reaction curve:

ir# (s reenue-

And "R(G !(%(G ( @ (

8etting "R(G 0 gies (G (, and 2G '.

e concude that ir# ( produces tice as #uch as ir# 2 and#a$es tice as #uch pro&it. oing first gives "irm # an advantage.

21 1 1 1 2 1

30R PQ Q Q Q Q= =

2 1

115

2Q Q= -12+2.

-12+3.

-12+&.


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PRICE C)"PETITI)6(2.*

Price Co#petition ith Ho#ogeneousProductsFThe


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Price Co#petition ith /i&&erentiated Products

8uppose each o& to duopoists has &i3ed costs o& J20 but 4eroariabe costs, and that they &ace the sa#e de#and cures-

"irm #$s demand:

"irm %$s demand:

Choosing Prices

ir# (s pro&it-

ir# (s pro&it #a3i#i4ing price-

"irm #$s reaction curve:

"irm %$s reaction curve:

1 1 212 2Q P P= +

2 2 112 2Q P P= +

1 213 4P P= +

21 1 1 1 1 1 2

20 12 2 20PQ P P P P= = +

1 1 1 2 / 12 4 0P P P = + =

2 1

13

4P P= +

-12+5a.

-12+5b.


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Price Co#petition ith /i&&erentiated Products

Here to &ir#s se a di&&erentiatedproduct, and each &ir#s de#anddepends both on its on price and on itsco#petitors price. The to &ir#s choosetheir prices at the sa#e ti#e, each

ta$ing its co#petitors price as gien.

ir# (s reaction cure gies its pro&it:#a3i#i4ing price as a &unction o& theprice that ir# 2 sets, and si#iary &orir# 2.

The 6ash e;uiibriu# is at theintersection o& the to reaction cures-hen each &ir# charges a price o& J+, itis doing the best it can gien itsco#petitors price and has no incentieto change price.

Aso shon is the cousie e;uiibriu#- I&the &ir#s cooperatiey set price, they ichoose J1.

%ash 0*ilibri*m in Prices

(ig*re 12+,


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C)"PETITI)6 LER8?8 C)77?8I)6-THE PRI8)6ER8 /I7E""A

(2.+

In our e3a#pe, there are to &ir#s,

each o& hich has &i3ed costs o& J20and 4ero ariabe costs. They &ace thede#and cures-

"irm #$s demand:

"irm %$s demand:

e &ound that in 6ash e;uiibriu# each&ir# i charge a price o& J+ and earn apro&it o& J(2, hereas i& the &ir#scoude, they i charge a price o& J1and earn a pro&it o& J(1.


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C)"PETITI)6 LER8?8 C)77?8I)6-THE PRI8)6ER8 /I7E""A

(2.+

TA# 12+& Payoff Matri8 for Prisoners6 4ilemma

Prisoner

Confess 4on6t confess

Prisoner ACon&ess @, @ @(, @(0

/ont con&ess @(0, @( @2, @2

noncooperati'e game a#e in hich negotiation anden&orce#ent o& binding contracts are not possibe.

prisoners6 dilemma a#e theory e3a#pe in hich toprisoners #ust decide separatey hether to con&ess to a cri#eKi& a prisoner con&esses, he i receie a ighter sentence andhis acco#pice i receie a heaier one, but i& neithercon&esses, sentences i be ighter than i& both con&ess.

payoff matri8 Tabe shoing pro&it =or payo&&> to each &ir#gien its decision and the decision o& its co#petitor.

Payoff Matri8

The Prisoners6 4ilemma


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I"P7ICATI)68 ) THE PRI8)6ER8 /I7E""A)R )7I)P)7I8TIC PRICI6

(2.

Price Rigidity

price rigidity Characteristic o& oigopoistic #ar$ets byhich &ir#s are reuctant to change prices een i& costsor de#ands change.

9in9ed demand c*r'e model )igopoy #ode inhich each &ir# &aces a de#and cure $in$ed at thecurrenty preaiing price- at higher prices de#and isery eastic, hereas at oer prices it is ineastic.


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(2.

Price Rigidity

Each &ir# beiees that i& it raisesits price aboe the current pricePM, none o& its co#petitors i&oo suit, so it i ose #ost o&

its saes.Each &ir# aso beiees that i& itoers price, eeryone i &oosuit, and its saes i increaseony to the e3tent that #ar$etde#and increases.

As a resut, the &ir#s de#and

cure Dis $in$ed at price PM, andits #argina reenue cure "R isdiscontinuous at that point.

I& #argina cost increases &ro#"C to"C, the &ir# i stiproduce the sa#e output ee Mand charge the sa#e price PM.

The


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(2.

Price 8ignaing and Price 7eadership

price signaling or# o& i#picit cousion in hich a&ir# announces a price increase in the hope that other&ir#s i &oo suit.

price leadership Pattern o& pricing in hich one &ir#reguary announces price changes that other &ir#s then#atch.


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(2.


The interest rate that ban$s charge arge corporate cients is

caed theprime rate.


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(2.


The pri#e rate is the ratethat #a5or ban$s chargearge corporate custo#ers&or short:ter# oans. Itchanges ony in&re;uentybecause ban$s arereuctant to undercut oneanother. hen a changedoes occur, it begins ith

one ban$, and otherban$s ;uic$y &oo suit.The corporate bond rate isthe return on ong:ter#corporate bonds.


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Chapter12:Mono

polisticCompetitio

nandOligopoly



(2.

The /o#inant ir# "ode

Dis the #ar$et de#and cure, and+"is the suppy cure =i.e., the

aggregate #argina cost cure> o&the s#aer &ringe &ir#s.

The do#inant &ir# #ust deter#ineitsde#and cure DD. As the &igure

shos, this cure is 5ust thedi&&erence beteen #ar$et de#andand the suppy o& &ringe &ir#s.

At price P(, the suppy o& &ringe &ir#s

is 5ust e;ua to #ar$et de#andK thus

the do#inant &ir# can se nothing.At a price P2or ess, &ringe &ir#s i

not suppy any o& the good, so thedo#inant &ir# &aces the #ar$etde#and cure.

At prices beteen P(and P2, the

do#inant &ir# &aces the de#andcure DD.

Price )etting by a 4ominant (irm

(ig*re 12+


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Chapter12:Mono

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(2.

The /o#inant ir# "ode

The do#inant &ir# produces a;uantity Dat the point here its

#argina reenue "RDis e;ua to its

#argina cost "C/.

The corresponding price is PM.

At this price, &ringe &ir#s se

Tota saes e;ua '.

Price )etting by a 4ominant (irm

(ig*re 12+ -contin*ed.

dominant frm ir# ith a arge

share o& tota saes that sets price to#a3i#i4e pro&its, ta$ing into accountthe suppy response o& s#aer &ir#s.


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Chapter12:Mono

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nandOligopoly


CARTE78(2.1Producers in a cartele3picity agree to cooperate in setting pricesand output ees.

Anaysis o& Carte Pricing

T/ is the tota ord de#and cure&or oi, and 8c is the co#petitie=non:)PEC> suppy cure.

)PECs de#and D)PECis the

di&&erence beteen the to.


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Chapter12:Mono

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nandOligopoly

CARTE78(2.1

In (991, the &edera goern#ent aoed #i$ producers

in the si3 6e Engand states to cartei4e. The carteFcaed

the 6ortheast Interstate /airy Co#pactFset #ini#u# hoesae

prices &or #i$, and as e3e#pt &ro# the antitrust as. The

resut as that consu#ers in 6e Engand paid #ore &or agaon o& #i$ than consu#ers esehere in the nation.

8tudies hae suggested that the carte coering the 6e Engand states has caused

retai prices o& #i$ to rise by ony a &e cents a gaon. hy so itteN The reason is

that the 6e Engand carte is surrounded by a &ringe o& noncarte producersFna#ey,

dairy &ar#ers in 6e or$, 6e Oersey, and other states. E3panding the carte,

hoeer, oud hae shrun$ the co#petitie &ringe, thereby giing the carte a greater

in&uence oer #i$ prices.

ch11 microeconomics

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